IBM REPORTS 2011 THIRD-QUARTER RESULTS o o o o o o o o o o o o o Diluted EPS: - GAAP: $3.19, up 13 percent; - Operating (non-GAAP): $3.28, up 15 percent; Revenue: $26.2 billion, up 8 percent, up 3 percent adjusting for currency; Net income: - GAAP: $3.8 billion, up 7 percent; - Operating (non-GAAP): $4.0 billion, up 9 percent; Pre-tax income: - GAAP: $5.0 billion, up 7 percent; - Operating (non-GAAP): $5.2 billion, up 10 percent; Gross profit margin: - GAAP: 46.5 percent, up 1.2 points; - Operating (non-GAAP): 46.8 percent, up 1.5 points; Software revenue up 13 percent, 8 percent adjusting for currency; Services revenue up 8 percent, 2 percent adjusting for currency; - Services backlog of $137 billion, up $2.4 billion; Systems and Technology revenue up 4 percent, 1 percent adjusting for currency: - Power Systems up 15 percent; Growth markets revenue up 19 percent, 13 percent adjusting for currency; Business analytics revenue up 19 percent year to date; Smarter Planet revenue up 50 percent year to date; Cloud revenue year to date has doubled full-year 2010 revenue; Full-year 2011 Operating (non-GAAP) EPS expectations raised to at least $13.35 from at least $13.25. ARMONK, N.Y., October 17, 2011 . . . IBM (NYSE: IBM) today announced thirdquarter 2011 diluted earnings of $3.19 per share, compared with diluted earnings of $2.82 per share in the third quarter of 2010, an increase of 13 percent. Operating (non-GAAP) diluted earnings were $3.28 per share, compared with operating diluted earnings of $2.85 per share in the third quarter of 2010, an increase of 15 percent. Third-quarter net income was $3.8 billion compared with $3.6 billion in the third quarter of 2010, an increase of 7 percent. Operating (non-GAAP) net income was $4.0 billion compared with $3.6 billion in the third quarter of 2010, an increase of 9 percent. Total revenues for the third quarter of 2011 of $26.2 billion increased 8 percent (3 percent, adjusting for currency) from the third quarter of 2010. "In the third quarter, we drove revenue growth, margin expansion and increased earnings as a result of our innovation-based strategy and continued investment in growth initiatives," said Samuel J. Palmisano, IBM chairman, president and chief executive officer. “Growth markets delivered outstanding revenue performance across software, hardware, and services and contributed to the company's expanded margins. We also achieved strong results in Smarter Planet, business analytics and cloud. "Based on this performance, we are raising our 2011 full-year operating earnings per share expectations to at least $13.35." Third-Quarter GAAP - Operating (non-GAAP) Reconciliation Third-quarter operating (non-GAAP) diluted earnings exclude $0.09 per share of net charges: $0.11 per share for the amortization of purchased intangible assets and other acquisition-related charges, offset by ($0.01) per share for retirement-related items driven by changes to plan assets and liabilities primarily related to market performance. Full-Year 2011 Expectations IBM raised its expectations for full-year 2011 GAAP diluted earnings per share to at least $12.95 from at least $12.87; and operating (non-GAAP) diluted earnings per share to at least $13.35 from at least $13.25. The 2011 operating (non-GAAP) earnings exclude $0.40 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related items driven by changes to plan assets and liabilities primarily related to market performance. Geographic Regions The Americas’ third-quarter revenues were $10.9 billion, an increase of 7 percent (6 percent, adjusting for currency) from the 2010 period. Revenues from Europe/Middle East/Africa were $8.0 billion, up 9 percent (flat, adjusting for currency). Asia-Pacific revenues increased 10 percent (1 percent, adjusting for currency) to $6.5 billion. OEM revenues were $743 million, down 8 percent (8 percent, adjusting for currency) compared with the 2010 third quarter. Growth Markets Revenues from the company’s growth markets increased 19 percent (13 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — increased 17 percent (13 percent, adjusting for currency). Growth markets revenue represents 23 percent of IBM’s total geographic revenue for the third quarter. Services Total Global Services revenues increased 8 percent (2 percent, adjusting for currency). Global Technology Services segment revenues increased 9 percent (3 percent, adjusting for currency) to $10.3 billion. Global Business Services segment revenues were up 6 percent (flat, adjusting for currency) at $4.8 billion. Total Global Services pre-tax income increased to $2.5 billion, up 13 percent year over year. Pre-tax income from both Global Technology Services and Global Business Services also increased 13 percent. The estimated services backlog at September 30 was $137 billion, up $2.4 billion year over year at actual rates ($2.3 billion, adjusting for currency). Services backlog at the end of a quarter measures the current value of work under contract expected to be recognized as revenue in future quarters. Software Revenues from the Software segment were $5.8 billion, an increase of 13 percent (8 percent, adjusting for currency). Software pre-tax income of $2.2 billion was up 12 percent year over year. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.6 billion, an increase of 17 percent (12 percent, adjusting for currency) versus the third quarter of 2010. Operating systems revenues of $598 million increased 9 percent (4 percent, adjusting for currency) compared with the prior-year quarter. Revenues from the WebSphere family of software products increased 52 percent year over year. Information Management software revenues increased 12 percent. Revenues from Tivoli software increased 8 percent. Revenues from Lotus software increased 6 percent, and Rational software increased 7 percent. Hardware Revenues from the Systems and Technology segment totaled $4.5 billion for the quarter, up 4 percent (1 percent, adjusting for currency) from the third quarter of 2010. Systems and Technology pre-tax income was $318 million, an increase of 8 percent year over year. Systems revenues increased 6 percent (2 percent, adjusting for currency). Revenues from Power Systems increased 15 percent compared with the 2010 period. Revenues from System x increased 1 percent. Revenues from System z mainframe server products decreased 5 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 11 percent. Revenues from System Storage increased 8 percent, and revenues from Retail Store Solutions increased 14 percent year over year. Revenues from Microelectronics OEM decreased 6 percent. Financing Global Financing segment revenues decreased 2 percent (6 percent, adjusting for currency) in the third quarter to $520 million. Pre-tax income for the segment decreased 4 percent to $481 million. *** The company’s total gross profit margin was 46.5 percent in the 2011 third quarter compared with 45.3 percent in the 2010 third-quarter period. Total operating (non-GAAP) gross profit margin was 46.8 percent in the 2011 third quarter compared with 45.4 percent in the 2010 third-quarter period, with increases in Software, Services and Systems and Technology. Total expense and other income increased 13 percent to $7.1 billion compared with the prior-year period. S,G&A expense of $5.7 billion increased 10 percent compared with prior-year expense. R,D&E expense of $1.5 billion increased 6 percent compared with the year-ago period. Intellectual property and custom development income increased to $298 million compared with $278 million a year ago. Other (income) and expense was expense of $128 million compared with prior-year income of $106 million. Interest expense increased to $107 million compared with $95 million in the prior year. Total operating (non-GAAP) expense and other income increased 12 percent to $7.1 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense of $5.6 billion increased 10 percent year over year compared with prior-year expense. Operating (non-GAAP) R,D&E expense of $1.6 billion increased 5 percent compared with the year-ago period. Pre-tax income increased 7 percent to $5.0 billion, and pre-tax margin was 19.2 percent, down 0.1 points. Operating (non-GAAP) pre-tax income increased 10 percent to $5.2 billion and pre-tax margin was 19.8 percent, up 0.4 points. IBM’s tax rate was 23.6 percent, up 0.4 points year over year; operating (nonGAAP) tax rate was also 23.6 percent, up 0.6 points. Net income margin decreased 0.1 points to 14.7 percent. Operating (non-GAAP) net income margin increased 0.2 points to 15.1 percent. The weighted-average number of diluted common shares outstanding in the thirdquarter 2011 was 1.20 billion compared with 1.27 billion shares in the same period of 2010. As of September 30, 2011, there were 1.18 billion basic common shares outstanding. Debt, including Global Financing, totaled $30.2 billion, compared with $28.6 billion at year-end 2010. From a management segment view, Global Financing debt totaled $22.8 billion versus $22.8 billion at year-end 2010, resulting in a debt-toequity ratio of 7.1 to 1. Non-global financing debt totaled $7.4 billion, an increase of $1.6 billion since year-end 2010, resulting in a debt-to-capitalization ratio of 27.8 percent from 22.6 percent. IBM ended the third-quarter 2011 with $11.3 billion of cash on hand and generated free cash flow of $3.5 billion, up approximately $300 million year over year. The company returned $4.3 billion to shareholders through $0.9 billion in dividends and $3.4 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to support the business over the long term. Year-To-Date 2011 Results Net income for the nine months ended September 30, 2011 was $10.4 billion compared with $9.6 billion in the year-ago period, an increase of 8 percent. Diluted earnings per share were $8.48 compared with $7.38 per diluted share for the 2010 period, an increase of 15 percent. Revenues for the nine-month period totaled $77.4 billion, an increase of 9 percent (4 percent, adjusting for currency) compared with $70.9 billion for the nine months of 2010. Operating (non-GAAP) net income for the nine months ended September 30, 2011 was $10.7 billion compared with $9.7 billion in the year-ago period, an increase of 11 percent. Operating (non-GAAP) diluted earnings per share were $8.77 compared with $7.45 per diluted share for the 2010 period, an increase of 18 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 corporate IT 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; breaches of data security; fluctuations in financial results and purchases, 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 and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, 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 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). The rationale for management’s use of non-GAAP measures is included as part of the supplementary materials presented within the third-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 Supplementary 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. EDT, today. Investors may participate by viewing the Webcast at www.ibm.com/investor/3q11. Presentation charts will be available on the Web site 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 September 30, Percent 2011 2010* Change ------- ------- ------- Nine Months Ended September 30, Percent 2011 2010* Change ------- ------- ------- REVENUE Global Technology Services Gross margin $10,322 35.7% $9,496 35.1% Global Business Services Gross margin 4,832 29.4% Software Gross margin Systems and Technology Gross margin Global Financing Gross margin Other Gross margin 8.7% $30,427 $28,036 34.5% 34.5% 8.5% 4,572 28.6% 5.7% 14,407 28.6% 13,465 28.0% 7.0% 5,817 88.1% 5,151 87.9% 12.9% 17,295 87.9% 15,447 87.2% 12.0% 4,482 39.8% 4,325 36.4% 3.6% 13,182 39.5% 11,696 35.2% 12.7% 520 47.4% 529 53.3% -1.7% 1,555 49.9% 1,610 51.1% -3.4% 182 -48.3% 199 -10.8% -8.3% 563 -66.7% 599 -13.3% -5.9% TOTAL REVENUE 26,157 24,271 7.8% 77,430 70,852 9.3% GROSS PROFIT Gross margin 12,173 46.5% 11,001 45.3% 10.6% 35,416 45.7% 31,787 44.9% 11.4% EXPENSE AND OTHER INCOME S,G&A % of revenue 5,662 21.6% 5,149 21.2% 10.0% 17,518 22.6% 15,886 22.4% 10.3% R,D&E % of revenue 1,546 5.9% 1,464 6.0% 5.6% 4,703 6.1% 4,448 6.3% 5.7% (278) 7.2% (855) (836) 2.2% (106) 95 nm 13.5% 23 298 (746) 267 nm 11.6% Intellectual property and custom development income (298) Other (income) and expense 128 Interest expense 107 TOTAL EXPENSE AND OTHER INCOME % of revenue 7,146 27.3% 6,324 26.1% 13.0% 21,687 28.0% 19,019 26.8% 14.0% INCOME BEFORE INCOME TAXES Pre-tax margin 5,027 19.2% 4,677 19.3% 7.5% 13,729 17.7% 12,767 18.0% 7.5% Provision for income taxes Effective tax rate 1,188 1,088 9.2% 3,364 3,192 5.4% 23.6% 23.3% 24.5% 25.0% $3,839 ====== 14.7% $3,589 ====== 14.8% 7.0% $10,365 ======= 13.4% $9,576 ====== 13.5% 8.2% $3.19 $3.23 $2.82 $2.86 $8.48 $8.60 $7.38 $7.49 14.9% 14.8% WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's): ASSUMING DILUTION 1,204.9 BASIC 1,188.6 1,272.8 1,255.2 1,222.1 1,205.2 1,297.0 1,278.3 NET INCOME Net margin EARNINGS PER SHARE OF COMMON STOCK: ASSUMING DILUTION BASIC 13.1% 12.9% nm -- not meaningful * Segment gross profit margins in 2010 reclassified to conform with 2011 presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited) (Dollars in Millions) At September 30, 2011 ------------- At December 31, 2010 ------------ ASSETS Current Assets: Cash and cash equivalents $11,303 Marketable securities -Notes and accounts receivable - trade (net of allowances of $282 in 2011 and $324 in 2010) 9,719 Short-term financing receivables (net of allowances of $266 in 2011 and $342 in 2010) 14,145 Other accounts receivable (net of allowances of $11 in 2011 and $10 in 2010) 1,123 Inventories, at lower of average cost or market: Finished goods 618 Work in process and raw materials 2,045 ------------Total inventories 2,663 Deferred taxes 1,247 Prepaid expenses and other current assets 5,172 ------------Total Current Assets 45,373 Plant, rental machines, and other property Less: Accumulated depreciation 40,139 26,252 $10,661 990 10,834 16,257 1,134 432 2,018 ------------2,450 1,564 4,226 ------------48,116 40,289 26,193 ------------13,887 ------------14,096 9,830 5,131 2,570 24,913 3,033 5,422 ------------$110,158 ============= 10,548 3,068 3,220 25,136 3,488 5,778 ------------$113,452 ============= $2,360 6,071 7,093 4,826 11,252 4,426 ------------36,028 $4,216 6,778 7,804 5,028 11,580 5,156 ------------40,562 24,089 21,846 15,375 3,634 8,654 ------------87,781 15,978 3,666 8,226 ------------90,279 47,558 100,266 (107,434) (18,099) ------------22,291 45,418 92,532 (96,161) (18,743) ------------23,046 87 ------------22,378 ------------$110,158 ============= 126 ------------23,172 ------------$113,452 ============= Plant, rental machines, and other property - net Long-term financing receivables (net of allowances of $37 in 2011 and $58 in 2010) Prepaid pension assets Deferred taxes Goodwill Intangible assets - net Investments and sundry assets Total Assets 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 Total Liabilities and Equity INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited) Three Months Ended September 30, 2011 2010 ----------- (Dollars in Millions) Net Cash from Operating Activities per GAAP: $4,678 Nine Months Ended September 30, 2011 2010 ------------- $4,551 $12,750 $12,754 374 ------ 2,110 ------- 2,257 ------ 4,177 10,640 10,497 (1,007) (3,000) (2,881) 3,481 3,169 7,640 7,616 (64) 0 (893) (3,444) 86 (1,984) 0 (818) (3,653) 273 (223) 4 (2,593) (11,465) 1,093 (2,993) 0 (2,369) (11,774) 1,534 374 1,858 5,196 5,099 ($461) ($1,154) ($348) ($2,887) Less: the change in Global Financing (GF) Receivables 207 -----Net Cash from Operating Activities (Excluding GF Receivables) 4,471 Capital Expenditures, Net (991) 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 INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) THIRD-QUARTER 2011 ----------------------------------------------(Dollars in Millions) --------- Revenue --------External Internal Total -------- -------- -------- Pre-tax Income ------- Pre-tax Margin ------- $10,322 8.7% $316 -12.6% $10,638 7.9% $1,695 12.5% 15.9% Global Business Services Y-T-Y change 4,832 5.7% 199 0.1% 5,031 5.5% 775 12.8% 15.4% Software Y-T-Y change 5,817 12.9% 804 10.4% 6,621 12.6% 2,214 12.0% 33.4% Systems and Technology Y-T-Y change 4,482 3.6% 190 -3.2% 4,672 3.3% 318 7.8% 6.8% SEGMENTS Global Technology Services Y-T-Y change Global Financing Y-T-Y change TOTAL REPORTABLE SEGMENTS Y-T-Y change Eliminations / Other 520 -1.7% 480 10.9% 999 4.0% 481 -4.0% 48.2% $25,974 7.9% $1,989 3.7% $27,963 7.6% $5,484 10.4% 19.6% (1,989) (1,806) (457) $26,157 7.8% $5,027 7.5% 182 TOTAL IBM CONSOLIDATED Y-T-Y change $26,157 7.8% $0 19.2% (Dollars in Millions) THIRD-QUARTER 2010 ------------------------------------------------------- Revenue --------Pre-tax Pre-tax External Internal Total Income* Margin* -------- -------- -------------------- SEGMENTS Global Technology Services $9,496 $362 $9,857 $1,506 15.3% Global Business Services 4,572 199 4,771 687 14.4% Software 5,151 728 5,879 1,978 33.6% Systems and Technology 4,325 196 4,521 295 6.5% 529 432 961 502 52.2% $24,072 $1,917 $25,990 $4,968 19.1% Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED 199 $24,271 (1,917) $0 (1,718) $24,271 (291) $4,677 19.3% * Reclassified to conform with 2011 presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) (Dollars in Millions) NINE-MONTHS 2011 ------------------------------------------------------- Revenue --------Pre-tax Pre-tax External Internal Total Income Margin -------- -------- -------------------- SEGMENTS Global Technology Services Y-T-Y change $30,427 8.5% $943 -7.0% $31,370 8.0% $4,353 12.7% 13.9% Global Business Services Y-T-Y change 14,407 7.0% 604 0.9% 15,012 6.7% 2,166 19.6% 14.4% Software Y-T-Y change 17,295 12.0% 2,425 11.4% 19,720 11.9% 6,260 1.5% 31.7% Systems and Technology 13,182 652 13,834 843 6.1% Y-T-Y change 12.7% 14.1% 12.8% 197.9% Global Financing Y-T-Y change 1,555 -3.4% 1,524 20.3% 3,078 7.0% 1,497 7.6% 48.6% $76,866 9.4% $6,148 9.3% $83,015 9.4% $15,118 11.9% 18.2% (6,148) (5,585) (1,389) $77,430 9.3% $13,729 7.5% TOTAL REPORTABLE SEGMENTS Y-T-Y change Eliminations / Other TOTAL IBM CONSOLIDATED Y-T-Y change (Dollars in Millions) 563 $77,430 9.3% $0 17.7% NINE-MONTHS 2010 ------------------------------------------------------- Revenue --------Pre-tax Pre-tax External Internal Total Income* Margin* -------- -------- -------- -------------- SEGMENTS Global Technology Services $28,036 $1,014 $29,050 $3,863 13.3% Global Business Services 13,465 599 14,064 1,811 12.9% Software 15,447 2,176 17,623 6,167 35.0% Systems and Technology 11,696 572 12,267 283 2.3% 1,610 1,267 2,877 1,391 48.3% $70,253 $5,627 $75,880 $13,514 17.8% Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED 599 (5,627) $70,852 $0 (5,028) $70,852 (747) $12,767 18.0% * Reclassified to conform with 2011 presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited, Dollars in millions except per share amounts) Gross Profit Gross Profit Margin THIRD-QUARTER 2011 ----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments (Non-GAAP) -------- ------------ ------------- ----------$12,173 $87 ($7) $12,253 46.5% 0.3Pts 0.0Pts 46.8% S,G&A 5,662 (75) (0) 5,587 R,D&E 1,546 0 22 1,568 (18) 0 111 Other (Income) & Expense 128 Total Expense & Other (Income) 7,146 (92) 21 7,075 Pre-Tax Income 5,027 180 (29) 5,178 Pre-Tax Income Margin Provision for Income Taxes** Effective Tax Rate 19.2% 1,188 23.6% Net Income 3,839 Net Income Margin 14.7% Diluted Earnings Per Share $3.19 0.7Pts -0.1Pts 47 0.1Pts (11) -0.1Pts 133 0.5Pts $0.11 (17) -0.1Pts ($0.01) 19.8% 1,224 23.6% 3,954 15.1% $3.28 THIRD-QUARTER 2010 ----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments (Non-GAAP) -------- ------------ ------------- ----------Gross Profit $11,001 Gross Profit Margin 45.3% $65 0.3Pts ($53) -0.2Pts $11,013 45.4% S,G&A 5,149 (76) 20 5,094 R,D&E 1,464 0 31 1,495 1 0 Other (Income) & Expense (106) (105) Total Expense & Other (Income) 6,324 (75) 51 6,301 Pre-Tax Income 4,677 139 (104) 4,712 Pre-Tax Income Margin Provision for Income Taxes** Effective Tax Rate 19.3% 1,088 23.3% Net Income 3,589 Net Income Margin 14.8% Diluted Earnings Per Share $2.82 0.6Pts -0.4Pts 34 0.0Pts (38) -0.3Pts 105 0.4Pts $0.08 (66) -0.3Pts ($0.05) 19.4% 1,084 23.0% 3,628 14.9% $2.85 * Includes amortization of acquired intangible assets and other acquisition-related charges. ** Tax impact on operating (non-GAAP) pre-tax income 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. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited, Dollars in millions except per share amounts) Gross Profit Gross Profit Margin NINE-MONTHS 2011 ----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments (Non-GAAP) -------- ------------ ------------- ----------$35,416 $259 $12 $35,687 45.7% S,G&A 17,518 R,D&E 4,703 0.3Pts 46.1% (16) 17,276 0 65 4,768 23 (23) 0 1 Total Expense & Other (Income) 21,687 (249) 49 21,487 Pre-Tax Income 13,729 508 (37) 14,200 Other (Income) & Expense Pre-Tax Income Margin Provision for Income Taxes** Effective Tax Rate Net Income Net Income Margin Diluted Earnings Per Share 17.7% 3,364 24.5% 10,365 13.4% $8.48 (226) 0.0Pts 0.7Pts 132 0.1Pts 376 0.0Pts (17) -0.1Pts (20) 0.5Pts 0.0Pts $0.31 ($0.02) 18.3% 3,479 24.5% 10,721 13.8% $8.77 NINE-MONTHS 2010 ----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments (Non-GAAP) -------- ------------ ------------- ----------Gross Profit Gross Profit Margin $31,787 44.9% S,G&A 15,886 R,D&E 4,448 Other (Income) & Expense (746) $178 0.3Pts (199) ($144) -0.2Pts $31,820 44.9% 56 15,744 0 93 4,541 (2) 0 (747) Total Expense & Other (Income) 19,019 (200) 149 18,968 Pre-Tax Income 12,767 378 (293) 12,853 Pre-Tax Income Margin 18.0% 0.5Pts -0.4Pts 18.1% Provision for Income Taxes** Effective Tax Rate Net Income 3,192 25.0% 9,576 Net Income Margin Diluted Earnings Per Share 13.5% $7.38 106 0.1Pts 272 0.4Pts $0.21 (114) -0.3Pts (179) -0.3Pts ($0.14) 3,184 24.8% 9,669 13.6% $7.45 * Includes amortization of acquired intangible assets and other acquisition-related charges. ** Tax impact on operating (non-GAAP) pre-tax income 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. Contact: IBM Mike Fay, 914-499-6107 [email protected] John Bukovinsky, 732-618-3531 [email protected]