2Q 2013 Earnings Presentation July 17, 2013 www.ibm.com/investor Forward Looking Statements and Non-GAAP Information Certain comments made in this presentation may be characterized as forward looking under 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. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company's filings with the SEC. Copies are available from the SEC, from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. These charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together. In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, certain non-GAAP information including "operating earnings" and other "operating" financial measures. The rationale for management’s use of this non-GAAP information, the reconciliation of that information to GAAP, and other related information are included in supplemental materials entitled “Non-GAAP Supplemental Materials” that are linked to the Company’s investor relations web site at http://www.ibm.com/investor/events/2q13.phtml The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated July 17, 2013. www.ibm.com/investor 2 2Q 2013 Highlights Revenue $24.9B Operating (Non-GAAP) EPS Excl. Workforce Rebalancing* $3.22 $3.91 -3%, -1% yr/yr @CC -8% yr/yr +8% yr/yr Ø Software Key Branded Middleware grew double-digits @CC with share gains across the portfolio Ø Global Business Services returned to revenue growth @CC Ø Services backlog +3% yr/yr or 7% @CC Ø Hardware performance mixed; strength in System z mainframe Ø Strong performance across Smarter Planet, Analytics and Cloud Ø Expanded gross profit margins Ø Pre-tax and net margins include $1B charge for workforce rebalancing * 2Q13 excludes $1B charge for Workforce Rebalancing; yr/yr excludes WFR from both years for comparison purposes www.ibm.com/investor 3 2013 Expectations FY 2013 Operating EPS Expectations April “At Least” Expectations Rebalancing Charge without Offsetting Gain All In Excluding $1B 2Q Workforce Rebalancing Charge $16.70 $16.70 ~(0.65) Operational Performance 0.20 0.20 July “At Least” Expectations $16.25 $16.90 Ø No longer expect significant gain in second half to offset 2Q rebalancing charge; reduces “All In” view Increasing expecta4ons for opera4onal performance by $0.20 www.ibm.com/investor 4 $ in Billions, except EPS Key Financial Metrics P&L Highlights Revenue @CC PTI – Operating Excludes WFR* NI – Operating Excludes WFR* EPS – Operating Excludes WFR* 2Q13 $24.9 $4.6 $5.6 $3.6 $4.3 $3.22 $3.91 B/(W) Yr/Yr (3%) (1%) (16%) Flat (12%) 3% (8%) 8% P&L Ratios (Operating) GP Margin 2Q13 49.7% B/(W) Yr/Yr 1.4 pts PTI Margin 18.4% (2.7 pts) NI Margin 14.4% (1.5 pts) Tax Rate 22.0% 3.0 pts Excludes WFR* Excludes WFR* 22.5% 17.4% 0.8 pts 1.1 pts * 2Q13 excludes $1B charge for Workforce Rebalancing; yr/yr excludes WFR from both years for comparison purposes Cash Highlights Free Cash Flow (excl GF Receivables) Share Repurchase (Gross) Dividends Cash Balance @ June 30 2Q13 $2.7 3.6 1.0 10.4 www.ibm.com/investor Last 12 Mos. $17.0 12.1 3.9 5 Operating EPS Bridge – 2Q12 to 2Q13 $3.91 $3.51 ($0.12) $0.24 ($0.59) $0.18 $3.22 2Q13 Workforce Rebalancing Charge WF Rebal 2Q13 ($0.69) 2Q12 ($0.10) Margin Expansion 2Q12 Revenue Growth Margin Opera4ng EPS @ Actual Expansion Excl. WFR Workforce Share 2Q13 Rebalancing Repurchases Opera4ng EPS www.ibm.com/investor 6 Revenue by Geography $ in Billions Americas 2Q13 B/(W) Yr/Yr Rptd @CC $10.7 (3%) (3%) Europe/ME/A 7.8 Flat (1%) Asia Pacific 5.8 (8%) Flat Total Geographies excl. Retail Store Solutions IBM excl. Retail Store Solutions Major Markets Growth Markets BRIC Countries $24.4 $24.9 (4%) (3%) (1%) (1%) (3%) (3%) (1%) (1%) (5%) (2%) Flat 1% Flat 1% www.ibm.com/investor Canada/ LA U.S. -‐4% EMEA Japan APac +3% @CC OEM +5% 7 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions B/(W) Yr/Yr Rptd @CC 2Q13 B/(W) Yr/Yr Pts $9.5 (5%) (2%) 37.8% 1.5 pts Global Business Services 4.6 (1%) 2% 31.2% 0.4 pts Software 6.4 4% 5% 88.8% 0.4 pts Systems & Technology 3.8 36.7% (1.6 pts) 2Q13 Global Technology Services (12%) (11%) (8%) (7%) 0.5 (6%) (4%) 46.3% 0.4 pts $24.9 (3%) (1%) 49.7% 1.4 pts excl. Retail Store Solutions Global Financing Total Revenue & Op. GP Margin excl. Retail Store Solutions (3%) (1%) Con4nued margin expansion in Services and SoYware www.ibm.com/investor 8 Expense Summary $ in Billions SG&A – Operating Excl. Workforce Rebalancing** 2Q13 B/(W) Yr/Yr $6.5 (14%) 5.5 1 pts (1 pts) 1% 1 pts (1 pts) 1 pts 4% 0 pts (2 pts) 6 pts 1 pts (1 pts) 1 pts (1 pts) RD&E – Operating 1.5 IP and Development Income (0.2) (15%) Other (Income)/Expense (0.1) (31%) 0.1 16% Interest Expense Operating Expense & Other Income Excl. Workforce Rebalancing** $7.8 $6.8 B/(W) Yr/Yr Drivers Currency Acq.* Base (11%) 1% (14 pts) (10 pts) 2 pts * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges ** 2Q13 excludes $1B charge for Workforce Rebalancing; yr/yr excludes WFR from both years for comparison purposes www.ibm.com/investor 9 Services Segments Global Technology Services (GTS) $ in Billions 2Q13 $9.5 37.8% $1.5 $1.9 15.4% 19.0% Revenue (External) Gross Margin (External) Pre-Tax Income excluding WFR PTI Margin excluding WFR Global Business Services (GBS) B/(W) Yr/Yr Rptd @CC (5%) (2%) 1.5 pts (14%) 3% (1.7 pts) 1.3 pts 2Q13 Revenue $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income excluding WFR PTI Margin excluding WFR 2Q13 Revenue Yr/Yr GTS GTS Outsourcing Integrated Technology Services Maintenance Rptd (6%) (2%) (4%) @CC (3%) 1% (2%) (1%) (1%) 3% 2% 3% 7% GBS GBS Outsourcing Consulting & Systems Integration Services Backlog 2Q13 $141B 2Q13 $4.6 31.2% $0.6 $0.9 13.0% 17.9% B/(W) Yr/Yr Rptd @CC (1%) 2% 0.4 pts (22%) 2% (3.6 pts) 0.5 pts (% of Total Services) Maint. 13% GTS Outsourcing 39% ITS 16% GBS C&SI 25% GBS Outsourcing 7% Con4nued backlog growth and gross margin expansion www.ibm.com/investor 10 Software Segment B/(W) Yr/Yr $ in Billions 2Q13 $6.4 88.8% $2.4 $2.7 34.1% 37.2% Revenue (External) Gross Margin (External) Pre-Tax Income excluding WFR PTI Margin excluding WFR 2Q13 Revenue Yr/Yr Rptd @CC WebSphere Family 9% 10% Information Management 5% 6% Tivoli 13% 14% Social Workforce Solutions 22% 23% Rational 12% 13% Key Branded Middleware 9% 10% Total Middleware 5% 7% Total Software 4% 5% Rptd 4% 0.4 pts (2%) 6% (1.8 pts) 0.9 pts @CC 5% 2Q13 Revenue (% of Total SoYware) Key Branded Middleware 67% Other Middleware 16% Opera4ng Systems 9% Other 8% Broad-‐based strength across Key Branded Middleware www.ibm.com/investor 11 Systems & Technology Segment $ in Billions 2Q13 Revenue (External) – including RSS excluding RSS Gross Margin (External) Pre-Tax Income excluding WFR PTI Margin excluding WFR 2Q13 Revenue $3.8 36.7% ($0.1) $0.1 (3.6%) 1.6% Yr/Yr System z Power Systems System x Storage Total Systems excl. RSS Microelectronics OEM Total Systems & Technology excl. RSS Rptd 10% (25%) (11%) (7%) (10%) 6% (8%) @CC 11% (24%) (10%) (6%) (9%) 6% (7%) B/(W) Yr/Yr Rptd @CC (12%) (8%) (1.6 pts) (160%) (76%) (8.9 pts) (4.3 pts) (11%) (7%) 2Q13 Revenue (% of Total Sys & Tech) Servers 67% Storage 21% Micr o OE 12% M Strong performance in System z www.ibm.com/investor 12 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 2Q13 B/(W) Yr/Yr YTD 2Q13 B/(W) Yr/Yr $3.2 ($1.3) $7.2 ($1.5) (0.5) 0.1 1.1 0.2 3.6 (1.3) 6.1 (1.8) (0.9) 0.3 (1.7) 0.6 2.7 (1.0) 4.4 (1.1) Acquisitions (0.1) 0.5 (0.2) 1.7 Divestitures 0.0 0.0 0.0 0.0 Dividends (1.0) (0.1) (2.0) (0.1) Share Repurchases (Gross) (3.6) (0.6) (6.1) (0.1) 0.9 0.0 0.2 (1.4) (0.5) 0.7 2.9 1.0 Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Non-GF Debt Other (includes GF A/R & GF Debt) Change in Cash & Marketable Securities ($1.6) www.ibm.com/investor ($0.5) ($0.8) $0.0 13 Balance Sheet Summary June 12 Dec. 12 June 13 $11.2 $11.1 $10.4 Non-GF Assets* 70.2 70.6 70.1 Global Financing Assets 32.5 37.5 34.7 113.8 119.2 115.2 Other Liabilities 60.8 67.0 63.1 Non-GF Debt* 9.8 8.8 9.3 22.6 24.5 24.9 32.4 33.3 34.1 Total Liabilities 93.3 100.2 97.3 Equity 20.6 19.0 17.9 36% 36% 39% 7.0 7.0 7.2 $ in Billions Cash & Marketable Securities Total Assets Global Financing Debt Total Debt Non-GF Debt / Capital Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 14 2015e At least $20 2013e* 2012 $16.90+ $15.25 2011 $13.44 2010 $11.67 2Q 2013 Summary Ø Solid performance in higher margin Software and System z mainframe businesses Ø Continued strength in Smarter Planet, Cloud and Business Analytics Ø Services backlog growth driven by significant new business in 1H Ø 2Q actions better position business for the future • Workforce rebalancing action • SoftLayer acquisition Operating EPS * Excludes $1B 2Q Workforce Rebalancing charge; base for operational trajectory into 2014 Increasing expecta4ons for 2013 Opera4ng EPS to at least $16.90 excluding 2Q Workforce Rebalancing charge www.ibm.com/investor 15 www.ibm.com/investor 16 Supplemental Materials Supplemental Materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding Ø Ø Ø Ø Ø Ø Ø Ø Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems & Technology, Software Pre-Tax Income by Segment Global Financing Portfolio Revenue by Key Industry Sales Unit Cash Flow (FAS 95) Non-GAAP Supplemental Materials • Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency • Cash Flow, Debt-to-Capital Ratio, Retail Store Solutions (RSS) Divestiture, Workforce Rebalancing • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 2Q 2013 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2012 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2013 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2012 • Reconciliation of Operating EPS Bridge – 2Q 2012 to 2Q 2013 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2013 and 2Q 2012 • Reconciliation of B/(W) Yr/Yr Expense Drivers – 2Q 2013 • Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 6/30/13, 3 months ended 6/30/12 • Reconciliation of Revenue Growth • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Consolidated EPS www.ibm.com/investor 17 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ Yr/Yr @ 7/16 Spot 3Q13 4Q13 FY13 1Q13 Yr/Yr 2Q13 Yr/Yr 7/16 Spot Euro 0.76 1% 0.77 2% 0.76 5% 1% 2% Pound 0.65 (1%) 0.65 (3%) 0.66 (4%) (6%) (4%) (26%) (22%) (22%) (2 pts) ~(3 pts) ~(3 pts) (2-3 pts) ~(1-2 pts) ~(1-2 pts) ~(2 pts) ~(2 pts) Yen 92 IBM Revenue Impact (16%) 99 (23%) (2 pts) April 17 View 2Q13 Revenue As Reported Currency Impact Revenue @CC (US$B) Yr/Yr $24.9 (3%) (0.5) 99 (2 pts) (1%) www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 2Q 2013 Global Services Revenue Global Services Backlog / Signings Revenue Growth Yr/Yr @CC GTS Outsourcing (6%) (3%) Integrated Tech Services (2%) 1% Maintenance (4%) (2%) (5%) (2%) GBS Outsourcing (1%) 3% GBS C&SI (1%) 2% (1%) 2% Total GTS Total GBS Total Outsourcing (5%) (2%) Total Transactional (1%) 1% Maintenance (4%) (2%) $ in Billions Total Backlog Backlog 2Q13 Yr/Yr @CC $141 3% 7% 3% 7% Change in Backlog due to Currency Quarter-to-Quarter ($3) Year-to-Year ($5) Outsourcing Backlog $90 Signings Outsourcing 2Q13 Yr/Yr @CC $8.9 31% 31% 7.5 9% 14% $16.4 20% 22% - GTS O/S, GBS O/S (AMS) Transactional - ITS, Consulting & AMS SI (incl. US Federal) Total Signings Note: Actual backlog calculated using June 30 currency spot rates www.ibm.com/investor 19 Supplemental Materials Supplemental Segment Information – 2Q 2013 Systems & Technology Software Revenue Growth Revenue Growth Yr/Yr @CC 10% 11% Power Systems (25%) (24%) System x (11%) (10%) (7%) (6%) (10%) (9%) System z Storage Total Systems excl. RSS Microelectronics OEM Total Sys & Tech excl. RSS Yr/Yr @CC WebSphere Family 9% 10% Information Management 5% 6% Tivoli 13% 14% Social Workforce Sols. 22% 23% Rational 12% 13% 9% 10% GP% Share Key Branded Middleware Other Middleware 6% 6% (8%) (7%) (8%) (6%) 5% 7% Operating Systems (4%) (2%) Other Software/Services Flat 1% 4% 5% Total Middleware Total Software www.ibm.com/investor 20 Pre-Tax Income by Segment Segment PTI $ Segment PTI Margin PTI $ B/(W) Yr/Yr PTI % B/(W) Yr/Yr B/(W) Yr/Yr Excl. WFR* $1.5 (14%) 3% 15.4% (1.7 pts) 1.3 pts Global Business Services 0.6 (22%) 2% 13.0% (3.6 pts) 0.5 pts Software 2.4 (2%) 6% 34.1% (1.8 pts) 0.9 pts (3.6%) (8.9 pts) (4.3 pts) $ in Billions Global Technology Services Systems & Technology Global Financing Total Operating PTI (0.1) 0.6 $4.6 (160%) 4% (16%) B/(W) Yr/Yr Excl. WFR* (76%) 5% 51.8% 0.7 pts 0.8 pts Flat 18.4% (2.7 pts) 0.8 pts * 2Q13 excludes $1B charge for Workforce Rebalancing; yr/yr excludes WFR from both years for comparison purposes www.ibm.com/investor 21 Supplemental Materials Global Financing Portfolio 2Q13 – $27.9B Net External Receivables 50% Investment Grade 61% Non-Investment Grade 39% 40% 39% 30% 20% 22% 20% 10% 12% 6% 1% B to B- CCC+ to D 0% AAA to A- BBB+ to BBB- BB+ to BB 2Q13 1Q13 2Q12 Identified Loss Rate 0.8% 0.8% 0.8% Anticipated Loss Rate 0.4% 0.4% 0.5% Reserve Coverage 1.2% 1.2% 1.3% 3.4 3.2 2.6 $67M $42M $33M Client Days Delinquent Outstanding Commercial A/R > 30 days 22 BB- to B+ www.ibm.com/investor 22 Supplemental Materials Revenue by Key Industry Sales Unit $ in Billions Financial Services B/(W) Yr/Yr* Rptd @CC 2Q13 $7.0 1% 4% Public 3.3 (6%) (5%) Industrial 2.3 Flat 3% Distribution 1.9 (6%) (5%) Communications 2.0 (8%) (7%) General Business 7.1 (3%) (2%) $24.9 (3%) (1%) Total IBM Public Industrial Distribu4on Financial Services Comms General Business * Reclassified to conform with 2013 presentation www.ibm.com/investor 23 Supplemental Materials $ in Billions Cash Flow (FAS 95) QTD 2Q13 QTD 2Q12 YTD 2Q13 YTD 2Q12 $3.2 $3.9 $6.3 $6.9 Depreciation / Amortization of Intangibles 1.1 1.2 2.3 2.3 Stock-based Compensation 0.2 0.2 0.3 0.3 Working Capital / Other (0.9) (0.3) (2.8) (1.8) Global Financing A/R (0.5) (0.5) 1.1 0.9 3.2 4.4 7.2 8.7 (0.9) (1.3) (1.7) (2.3) 0.0 0.0 0.0 0.0 (0.1) (0.6) (0.2) (1.9) 0.2 0.2 0.0 0.3 (0.9) (1.7) (1.9) (3.9) 1.0 0.3 1.4 1.3 Dividends (1.0) (1.0) (2.0) (1.8) Common Stock Repurchases (3.6) (3.0) (6.1) (6.0) 0.3 0.3 0.7 0.9 (3.3) (3.4) (6.0) (5.7) 0.0 (0.4) (0.1) (0.2) ($1.0) ($0.9) ($1.1) Net Income from Operations Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Acquisitions, net of cash acquired Marketable Securities / Other Investments, net Net Cash used in Investing Activities Debt, net of payments & proceeds Common Stock Transactions - Other Net Cash used in Financing Activities Effect of Exchange Rate changes on Cash Net Change in Cash & Cash Equivalents ($1.0) www.ibm.com/investor 24 Supplemental Materials Non-GAAP Supplemental Materials In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, the following Non-GAAP information which management believes provides useful information to investors. Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items Management presents certain financial measures excluding the effects of certain acquisition-related charges, non-operating retirement-related costs, and any related tax impacts. Management uses the term "operating" to describe this view of the company's financial results and other financial information. For acquisitions, these measures exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses, and tax charges related to acquisition integration. For retirementrelated costs, the company has characterized certain items as operating and others as non-operating. The company includes service cost, amortization of prior service cost and the cost of defined contribution plans in its operating results. Non-operating retirement-related costs include interest cost, expected return on plan assets, amortized actuarial gains/ losses, the impacts of any plan curtailments/settlements, multi-employer plan costs, pension insolvency costs, and other costs. Non-operating costs primarily relate to changes in pension plan assets and liabilities which are tied to market performance, and management considers these costs to be outside the operational performance of the business. Management’s calculation of these operating measures, as presented, may differ from similarly titled measures reported by other companies. Overall, management believes that providing investors with an operating view as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans, improves visibility to management decisions and their impacts on operational performance, enables better comparison to peer companies, and allows the company to provide a long term strategic view of the business going forward. For the 2015 earnings per share roadmap, the company is utilizing an operating view to establish its objectives and track its progress. The company’s segment financial results and performance reflect operating earnings, consistent with the company’s management and measurement system. Constant Currency Management refers to growth rates at constant currency or adjusting for currency 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 the company's 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. www.ibm.com/investor 25 Supplemental Materials Non-GAAP Supplemental Materials Cash Flow Management uses a free cash flow measure to evaluate the company’s operating results, plan share repurchase levels, evaluate strategic investments and assess the company’s ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasing receivables is the basis for growth. Accordingly, management considers Global Financing receivables as a profitgenerating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and cash flow from operations that exclude the effect of Global Financing receivables. Debt-to-Capital Ratio Management presents its debt-to-capital ratio excluding the Global Financing business. A financing business is managed on a leveraged basis. The company funds its Global Financing segment using a debt-to-equity ratio target of approximately 7 to 1. Given this significant leverage, the company presents a debt-to-capital ratio which excludes the Global Financing segment debt and equity because the company believes this is more representative of the company’s core business operations. Retail Store Solutions (RSS) Divestiture On April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba Tec for the sale of its RSS business to Toshiba Tec. Management presents certain financial results excluding the effects of the RSS divestiture. Management believes that presenting financial information regarding revenue without this item is more representative of operational performance and provides additional insight into, and clarifies the basis for, historical and/or future performance, which may be more useful to investors. Workforce Rebalancing On April 18, 2013, the company announced it expected to take most of its workforce rebalancing actions for 2013 in the second quarter as compared to 2012 when these actions were distributed across the four quarters of the year. The company took a $1 billion workforce rebalancing charge in the second quarter. Management believes that presenting certain financial information without this item is most indicative of operational trajectory. www.ibm.com/investor 26 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of Opera4ng Earnings Per Share 2013 Expectations IBM GAAP EPS $15.08+ IBM Operating EPS (Non-GAAP) $16.25+ 2013 Expectations excl. 2Q Workforce Rebal. $16.90+ Adjustments Acquisition-Related Charges * $0.51 Amortization of Purchased Intangibles $0.50 Other Acquisition-Related Charges $0.01 Non-Operating Retirement-Related Items $0.66 * Includes acquisitions through June 30, 2013 The above serves to reconcile the Non-GAAP financial information contained in “2013 Expectations” discussion in the company’s earnings presentation. See Slides 25-26 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 27 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera4ng (Non-‐GAAP) Bridge – 2Q 2013 $ in Millions, except EPS Gross Profit GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $12,132 $91 $156 $12,379 SG&A 6,680 RD&E 1,548 Other Income & Expense (91) (91) 0 (0) Total Operating Expense & Other Income 7,988 (91) Pre-Tax Income 4,144 (93) 6,496 (13) 1,535 0 (91) (106) 7,791 182 262 4,588 918 9 82 1,009 Net Income 3,226 173 180 3,579 Diluted Earnings Per Share $2.91 $0.15 $0.16 $3.22 Tax *** * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges. ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other seAlements, curtailments, mul/-‐employer plans and insolvency insurance. ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “2Q 2013 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 28 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera4ng (Non-‐GAAP) Bridge – 2Q 2012 $ in Millions, except EPS Gross Profit GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $12,281 $93 $66 $12,440 (87) (33) SG&A 5,837 RD&E 1,587 Other Income & Expense (132) 0 5 (1) 0 Total Operating Expense & Other Income 7,120 (88) Pre-Tax Income 5,161 Tax *** 5,717 1,592 (133) (28) 7,004 181 94 5,436 1,280 49 30 1,359 Net Income 3,881 132 64 4,077 Diluted Earnings Per Share $3.34 $0.11 $0.06 $3.51 * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges. ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other seAlements, curtailments, mul/-‐employer plans and insolvency insurance. ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “2Q 2013 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 29 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera4ng (Non-‐GAAP) Bridge – 2Q YTD 2013 $ in Millions, except EPS Gross Profit GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $22,810 $186 $320 $23,316 (183) (197) 11,878 (29) 3,163 SG&A 12,257 RD&E 3,193 Other Income & Expense Total Operating Expense & Other Income (151) 15,060 0 (7) 0 (190) (226) (158) 14,644 Pre-Tax Income 7,750 376 546 8,672 Tax *** 1,492 63 162 1,717 Net Income 6,258 313 384 6,955 Diluted Earnings Per Share $5.60 $0.28 $0.35 $6.23 * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges. ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other seAlements, curtailments, mul/-‐employer plans and insolvency insurance. ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Year-To-Date 2013 Results” discussions in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 30 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera4ng (Non-‐GAAP) Bridge – 2Q YTD 2012 $ in Millions, except EPS Gross Profit GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $23,400 $181 $137 $23,718 SG&A 11,723 RD&E 3,188 Other Income & Expense Total Operating Expense & Other Income (190) 14,403 (171) 0 (2) (172) (69) 10 0 (60) 11,483 3,197 (192) 14,171 Pre-Tax Income 8,997 354 197 9,547 Tax *** 2,049 96 60 2,205 Net Income 6,948 258 137 7,342 Diluted Earnings Per Share $5.95 $0.22 $0.12 $6.29 * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges. ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other seAlements, curtailments, mul/-‐employer plans and insolvency insurance. ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Year-To-Date 2013 Results” discussions in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 31 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of Opera4ng EPS Bridge – 2Q 2012 to 2Q 2013 Retirement-related Adjustments** GAAP Acquisitionrelated Adjustments* 2Q12 EPS $3.34 $0.11 $0.06 $3.51 Revenue growth @ actual (0.11) (0.01) (0.00) (0.12) Margin expansion (0.45) 0.04 0.10 (0.31) 0.13 0.01 0.00 0.14 $2.91 $0.15 $0.16 $3.22 Share repurchases 2Q13 EPS Operating (Non-GAAP) * Includes amor/za/on of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges. ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other seAlements, curtailments, mul/-‐employer plans and insolvency insurance. The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 2Q12 to 2Q13” discussion in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 32 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera4ng (Non-‐GAAP) Bridge – 2Q 2013 and 2Q 2012 2Q 2013 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 48.7% 0.4 pts 0.6 pts 49.7% PTI Margin 16.6% 0.7 pts 1.1 pts 18.4% Tax Rate *** 22.1% (0.7 pts) 0.6 pts 22.0% Net Income Margin 12.9% 0.7 pts 0.7 pts 14.4% Gross Profit Margin 47.6% 0.4 pts 0.3 pts 48.2% PTI Margin 20.0% 0.7 pts 0.4 pts 21.1% Tax Rate *** 24.8% 0.1 pts 0.1 pts 25.0% Net Income Margin 15.1% 0.5 pts 0.2 pts 15.8% 2Q 2012 * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other seAlements, curtailments, mul/-‐employer plans and insolvency insurance ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” , “Operating non-GAAP results” and “PreTax Income’ discussions in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 33 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of B/(W) Yr/Yr Expense Drivers – 2Q 2013 GAAP Non-GAAP Adjustments Operating (Non-GAAP) SG&A Currency Acquisitions Base 1 pts 0 pts 1 pts (1 pts) 0 pts (1 pts) (14 pts) 1 pts (14 pts) RD&E Currency Acquisitions Base 0 pts 0 pts 0 pts (2 pts) 0 pts (2 pts) 4 pts 1 pts 6 pts 1 pts 0 pts 1 pts (2 pts) 0 pts (1 pts) (11 pts) 1 pts (10 pts) Operating Expense & Other Income Currency Acquisitions Base The above serves to reconcile the Non-GAAP financial information contained in the “Expense Summary” discussion in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 34 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of Free Cash Flow (excluding GF Receivables) $ in Billions Net Cash from Operations Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) 12 months ended 6/30/13 3 months ended 6/30/12 $18.1 $4.4 (2.7) 20.7 (3.7) $17.0 (0.5) 4.9 (1.3) $3.7 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussion in the company’s earnings presentation. See Slide 26 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 35 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of Revenue Growth 1Q13 Yr/Yr Europe/ME/A Japan Tivoli Security software Tivoli Storage software Global Business Services Power Systems As Rptd (4%) @CC (4%) (3%) (32%) Flat (31%) 2Q13 Yr/Yr As Rptd @CC (16%) 19% 16% 3% 20% 17% 1Q13 Yr/Yr vs. 2Q13 Yr/Yr As Rptd 2 pts IBM @CC 2 pts The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics,” “Revenue by Geography,” “Services Segments,” “Software Segment,” “Systems & Technology Segment,” discussions in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 36 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of Debt-‐to-‐Capital Ra4o June 2013 Dec. 2012 June 2012 Non-Global Financing Debt / Capital 39% 36% 36% IBM Consolidated Debt / Capital 66% 64% 61% The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussion in the company’s earnings presentation. See Slide 26 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 37 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia4on of Consolidated EPS EPS (As Reported) AcquisitionRelated Non-Operating RetirementRelated 2010 $11.52 $0.34 ($0.20) $11.67 2011 13.06 0.41 (0.03) 13.44 2012 14.37 0.55 0.33 15.25 Operating EPS The above serves to reconcile the Non-GAAP financial information contained in the “2Q 2013 Summary” discussion in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 38 www.ibm.com/investor 39