® 3Q 2012 Earnings Presentation October 16, 2012 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 posted on the Company’s investor relations web site at http://www.ibm.com/investor/3q12/ The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated October 16, 2012. www.ibm.com/investor 2 3Q 2012 Revenue $24.7B (5%), (2%) yr/yr @CC Operating Pre-Tax Income $5.5B +7% yr/yr Operating (Non-GAAP) EPS $3.62 +10% yr/yr Revenue performance: • Europe consistent with 2Q • Japan stabilized • BRIC double-digit growth • North America declined Continued strong performance in key solution areas of Smarter Planet, Business Analytics and Cloud Annuity businesses provide solid base of revenue and profit Expanded gross, pre-tax, and net margins Continue to expect at least $15.10 of Operating EPS in 2012 www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights Revenue 3Q12 B/(W) Yr/Yr $24.7 (5%) (2%)* @CC NI – Operating EPS – Operating $4.2 5% $3.62 10% Cash Highlights P&L Ratios (Operating) 3Q12 B/(W) Yr/Yr GP Margin 48.1% 1.2 pts PTI Margin 22.3% 2.5 pts Tax Rate 24.7% (1.1 pts) NI Margin 16.8% 1.7 pts 3Q12 Last 12 Mos. $3.1 $17.6 Share Repurchase 3.0 12.6 Dividends 1.0 3.7 Free Cash Flow (excl GF Receivables) Cash Balance @ Sept. 30 12.3 * Revenue down 1% @CC excluding impact of divested Retail Store Solutions business www.ibm.com/investor 4 Operating EPS Bridge – 3Q11 to 3Q12 $0.17 $3.62 $0.34 $3.28 ($0.17) RSS Divestiture Gain * $0.23 Gross Margin Expansion $0.19 Expense Productivity $0.16 W/F Rebalancing Charge ($0.24) 3Q11 Operating EPS Revenue Growth @ Actual Margin Expansion Share Repurchases 3Q12 Operating EPS * Based on discrete tax rate www.ibm.com/investor 5 Operating EPS Bridge – 1H11 to 1H12 $0.32 $6.29 $0.56 $5.50 ($0.09) 1H11 Operating EPS Revenue Growth @ Actual Margin Expansion www.ibm.com/investor Share Repurchases 1H12 Operating EPS 6 Revenue by Geography 3Q12 B/(W) Yr/Yr Rptd @CC $10.4 (4%) (3%) Europe/ME/A 7.2 (9%) (1%) Asia Pacific 6.5 1% 2% $ in Billions Americas Total Geographies excl. Retail Store Solutions IBM $24.2 (4%) Flat (5%) Major Markets (6%) (2%) Growth Markets (1%) 4% 4% 11% BRIC Countries (5%) (1%) (2%) (1%) excl. Retail Store Solutions $24.7 (5%) Canada/ LA EMEA U.S. -4% Japan APac Flat @CC OEM -28% EMEA steady, Japan stabilized, BRIC strength, North America declined www.ibm.com/investor 7 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions B/(W) Yr/Yr Rptd @CC 3Q12 B/(W) Yr/Yr Pts $9.9 (4%) 1% 37.3% 1.6 pts Global Business Services 4.5 (6%) (3%) 31.2% 1.7 pts Software 5.8 (1%) 3% 88.0% Flat Systems & Technology 3.9 (13%) (12%) 37.3% (2.6 pts) (11%) (9%) 0.5 (9%) (5%) 45.8% (1.6 pts) $24.7 (5%) (2%) 48.1% 1.2 pts (5%) (1%) 3Q12 Global Technology Services excl. Retail Store Solutions Global Financing Total Revenue & Op. GP Margin excl. RSS www.ibm.com/investor 8 Expense Summary $ in Billions SG&A – Operating includes Workforce Rebalancing 3Q12 B/(W) Yr/Yr $5.6 0.4 B/(W) Yr/Yr Drivers Currency Acq.* Base (1%) 4 pts (2 pts) (3 pts) SG&A excl. Workforce Rebalancing 5.2 6% 4 pts (2 pts) 5 pts RD&E – Operating 1.5 2% 3 pts (4 pts) 3 pts IP and Development Income (0.3) 1% Other (Income)/Expense (0.6) 8 pts (3 pts) 5 pts includes Retail Store Solutions Gain Interest Expense Operating Expense & Other Income (0.4) 0.1 $6.4 (15%) 10% * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges www.ibm.com/investor 9 Pre-Tax Income by Segment Segment PTI $ $ in Billions Global Technology Services Segment PTI Margin B/(W) Yr/Yr w/o Wkfrce Rebal.* PTI % B/(W) Yr/Yr B/(W) Yr/Yr w/o Wkfrce Rebal.* PTI $ B/(W) Yr/Yr $1.7 Flat 9% 16.6% 0.7 pts 2.1 pts 9% 15.6% 0.2 pts 2.5 pts 10% 35.6% 2.2 pts 3.5 pts (3.8 pts) (2.7 pts) Global Business Services 0.7 (5%) Software 2.4 6% Systems & Technology 0.1 (61%) (47%) 3.0% Global Financing 0.5 (1%) (1%) 49.4% 1.2 pts 1.5 pts 14% 22.3% 2.5 pts 4.1 pts Total Operating PTI $5.5 7% * 3Q12 Workforce Rebalancing charge of $407M, 3Q11 Workforce Rebalancing charge of $21M Services and Software profit growth and margin expansion www.ibm.com/investor 10 Services Segments Global Technology Services (GTS) $ in Billions 3Q12 $9.9 37.3% $1.7 Revenue (External) Gross Margin (External) Pre-Tax Income excluding Wkfrce Rebal. PTI Margin excluding Wkfrce Rebal. B/(W) Yr/Yr Rptd @CC (4%) 1% 1.6 pts Flat $ in Billions 9% 16.6% 0.7 pts 18.1% 2.1 pts Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin excluding Wkfrce Rebal. Yr/Yr GTS GTS Outsourcing Integrated Technology Services Maintenance Rptd (5%) (1%) (5%) @CC Flat 3% Flat (7%) (6%) (3%) (3%) 1% 1% GBS GBS Outsourcing Consulting & Systems Integration Services Backlog 3Q12 $138B 3Q12 $4.5 31.2% $0.7 excluding Wkfrce Rebal. $1.8 3Q12 Revenue Global Business Services (GBS) B/(W) Yr/Yr Rptd @CC (6%) (3%) 1.7 pts (5%) $0.9 9% 15.6% 0.2 pts 18.0% 2.5 pts 3Q12 Revenue (% of Total Services) Maint. 13% GTS Outsourcing 40% GBS Outsourcing 7% ITS 16% GBS C&SI 24% Backlog growth and margin expansion www.ibm.com/investor 11 Software Segment B/(W) Yr/Yr $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income excluding Wkfrce Rebal. PTI Margin excluding Wkfrce Rebal. 3Q12 $5.8 88.0% $2.4 Rptd (1%) Flat 6% $2.4 10% 35.6% 2.2 pts 37.1% 3.5 pts Yr/Yr Rptd @CC 3Q12 Revenue WebSphere Family Information Management Tivoli 2% 5% (1%) 3% 5% 9% Lotus (10%) (7%) Rational (16%) (13%) Key Branded Middleware (1%) 3% Total Middleware (2%) 2% Total Software (1%) 3% @CC 3% 3Q12 Revenue (% of Total Software) Key Branded Middleware 63% Other Middleware 19% Operating Systems Other10% 8% Double-digit growth in Software Solutions www.ibm.com/investor 12 Systems & Technology Segment $ in Billions 3Q12 Revenue (External) – including RSS $3.9 excluding RSS Gross Margin (External) Pre-Tax Income excluding Wkfrce Rebal. PTI Margin excluding Wkfrce Rebal. System z Power Systems System x Storage Total Systems excl. RSS Microelectronics OEM Total Systems & Technology excl. RSS Rptd (20%) (2%) (5%) (10%) (8%) (25%) (11%) @CC (19%) (1%) (3%) (8%) (6%) (25%) (9%) Retail Store Solutions (Divested) (79%) (79%) (13%) (12%) (11%) (9%) 37.3% $0.1 (2.6 pts) (61%) $0.2 (47%) 3.0% (3.8 pts) 4.1% (2.7 pts) Yr/Yr 3Q12 Revenue B/(W) Yr/Yr @CC Rptd 3Q12 Revenue (% of Total Sys & Tech) Servers 68% Storage 19% M i cr o OE 1 2% M RSS (Divested) New Enterprise Servers and Storage in 4Q www.ibm.com/investor 13 Growth Initiatives Smarter Planet 3Q YTD Revenue up >20% yr/yr Growth Markets Business Analytics 3Q YTD Revenue up 7% yr/yr @CC 3Q YTD Revenue up 14% yr/yr Cloud 3Q YTD Revenue > Full Year 2011 Continued strength in our key growth initiatives 14 www.ibm.com/investor 14 Free Cash Flow Bridge – 3Q11 to 3Q12 $0.2B ($0.2B) $0.2B ($0.3B) $3.5B ($0.2B) ($0.1B) GAAP Net Income Flat Yr/Yr 3Q11 Free Cash Flow Operating Net Income NonB/S Impact of Cash Taxes Workforce Operating Non-Operating, Rebalancing Charges/ Non-Cash Adjs. Payments/Other Cost www.ibm.com/investor Capex $3.1B 3Q12 Free Cash Flow 15 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 3Q12 B/(W) Yr/Yr YTD 3Q12 B/(W) Yr/Yr $4.5 ($0.2) $13.2 $0.5 0.3 0.1 4.2 (0.3) 12.0 (1.0) (0.1) (3.3) (0.3) 3.1 (0.3) 8.7 1.0 Acquisitions (0.3) (0.3) (2.3) (2.0) Divestitures 0.6 0.6 0.6 0.6 Dividends (1.0) (0.1) (2.8) (0.2) Share Repurchases (3.0) 0.5 (9.0) 2.5 Non-GF Debt 0.7 0.6 2.3 1.2 Other (includes GF A/R & GF Debt) 1.0 0.6 2.9 (2.3) $1.1 $1.5 $0.3 Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Change in Cash & Marketable Securities www.ibm.com/investor 1.2 (0.9) 1.4 $0.7 16 Balance Sheet Summary Sept. 11 Dec. 11 Sept. 12 $11.3 $11.9 $12.3 Non-GF Assets* 67.5 69.4 71.2 Global Financing Assets 31.4 35.1 32.3 110.2 116.4 115.8 Other Liabilities 57.6 64.9 60.4 Non-GF Debt* 7.4 8.0 10.3 22.8 23.3 23.3 30.2 31.3 33.7 Total Liabilities 87.8 96.2 94.1 Equity 22.4 20.2 21.7 28% 32% 36% 7.1 7.2 7.1 $ 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 17 2015e At least $20 3Q 2012 Summary Double-digit operating EPS growth 2012e $15.10+ 2011 $13.44 2010 $11.67 Strong performance in key solution areas of Smarter Planet, Business Analytics and Cloud Annuity businesses provide solid base of revenue and profit Productivity and mix contribute to gross, pre-tax, and net margin expansion Strong balance sheet and cash generation enable shareholder returns Operating EPS Continue to expect at least $15.10 of Operating EPS in 2012 www.ibm.com/investor 18 www.ibm.com/investor 19 Supplemental Materials Supplemental Materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems & Technology, Software 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, Workforce Rebalancing, Retail Store Solutions (RSS) Divestiture • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 3Q 2012 • GAAP to Operating (Non-GAAP) Bridge – 3Q 2011 • Reconciliation of Operating EPS Bridge 3Q11 to 3Q12 • Reconciliation of Operating EPS Bridge 1H11 to 1H12 • Reconciliation of Revenue Growth • GAAP to Operating (Non-GAAP) Bridge – 3Q 2012 • GAAP to Operating (Non-GAAP) Bridge – 3Q 2011 • Reconciliation of B/(W) Yr/Yr Expense Drivers – 3Q12 • Reconciliation of Free Cash Flow (excluding GF Receivables) • Reconciliation of Debt-to-Capital Ratio www.ibm.com/investor 20 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ @ 10/15 Spot FY12 4Q12 1Q12 Yr/Yr 2Q12 Yr/Yr 3Q12 Yr/Yr 10/15 Spot Euro 0.76 (4%) 0.78 (12%) 0.80 (13%) 0.77 (4%) (8%) Pound 0.64 (2%) 0.63 (3%) 0.63 (2%) 0.62 2% (1%) 79 4% 80 2% 79 (1%) 79 (2%) 1% ~(1 pts) ~(2 pts) Yen Revenue Impact - Pts (1 pts) (4 pts) 3Q12 (4 pts) (US$B) Revenue As Reported $24.7 Currency Impact Revenue @CC (0.9) $25.7 www.ibm.com/investor Yr/Yr (5%) (4 pts) (2%) 21 Supplemental Materials Supplemental Segment Information – 3Q 2012 Supplemental Revenue Information Supplemental Backlog / Signings Information Revenue Growth $ in Billions Yr/Yr @CC Global Services 3Q12 Yr/Yr @CC GTS Outsourcing (5%) Flat Total Backlog $138 1% 1% Integrated Tech Services (1%) 3% Change in Backlog due to Currency Maintenance (5%) Flat (4%) 1% (1%) Flat GBS Outsourcing (7%) (3%) $ in Billions GBS C&SI (6%) (3%) Global Services (6%) (3%) Outsourcing Global Services Total GTS Total GBS Quarter-to-Quarter Year-to-Year Outsourcing Backlog Backlog $2 ($1) $89 Signings 3Q12 Yr/Yr @CC $7.3 26% 30% (8%) (6%) - GTS O/S, GBS O/S (AMS) Total Outsourcing (5%) (1%) Total Transactional (4%) Flat Maintenance (5%) Flat Transactional 6.0 - ITS, Consulting & AMS SI (incl. US Federal) Total Signings $13.3 8% 11% Note: Actual backlog calculated using September 30 currency spot rates www.ibm.com/investor 22 Supplemental Materials Supplemental Segment Information – 3Q 2012 Revenue Growth Revenue Growth Systems & Technology @CC 2% 5% (1%) 3% 5% 9% (20%) (19%) Power Systems (2%) (1%) System x (5%) (3%) Lotus (10%) (7%) (10%) (8%) Rational (16%) (13%) (8%) (6%) Microelectronics OEM (25%) (25%) Total Sys & Tech excl. RSS (11%) (9%) (79%) (79%) Storage Total Systems excl. RSS Retail Store Solutions Share Yr/Yr @CC System z GP% Software Yr/Yr = WebSphere Family Information Management Tivoli Key Branded Middleware (1%) 3% (6%) (2%) Total Middleware (2%) 2% Operating Systems Flat 4% 7% 10% Other Middleware Other Software/Services Total Software www.ibm.com/investor (1%) 3% 23 Supplemental Materials Global Financing Portfolio 3Q12 – $25.1B Net External Receivables 40% Investment Grade 60% 36% 30% 20% Non-Investment Grade 40% 24% 21% 10% 12% 6% 1% B2-B3 Caa-D 0% Aaa-A3 Baa1-Baa3 Ba1-Ba2 3Q12 2Q12 3Q11 Identified Loss Rate 0.9% 0.8% 1.0% Anticipated Loss Rate 0.5% 0.5% 0.3% Reserve Coverage 1.3% 1.3% 1.3% 2.9 2.6 2.7 $36M $33M $46M Client Days Delinquent Outstanding Commercial A/R > 30 days 24 Ba3-B1 www.ibm.com/investor 24 Supplemental Materials Revenue by Key Industry Sales Unit $ in Billions Financial Services 3Q12 B/(W) Yr/Yr Rptd @CC $7.2 (3%) 1% Public 3.7 (3%) (1%) Industrial 2.3 (6%) (2%) Distribution 2.2 (10%) (6%) Communications 2.3 (7%) (4%) General Business 5.8 (2%) 3% $24.7 (5%) (2%) Total IBM www.ibm.com/investor Public Financial Services Industrial Distribution Comms General Business 25 Supplemental Materials $ in Billions Cash Flow (FAS 95) QTD 3Q12 QTD 3Q11 YTD 3Q12 YTD 3Q11 $3.8 $3.8 $10.8 $10.4 Depreciation / Amortization of Intangibles 1.2 1.2 3.5 3.6 Stock-based Compensation 0.2 0.2 0.5 0.5 (1.0) (0.7) (2.8) (3.9) 0.3 0.2 1.2 2.1 4.5 4.7 13.2 12.7 (1.0) (1.0) (3.3) (3.0) 0.6 0.0 0.6 0.0 Acquisitions, net of cash acquired (0.3) (0.1) (2.3) (0.2) Marketable Securities / Other Investments, net (0.2) 0.2 0.1 2.3 (1.0) (0.8) (4.9) (0.9) 1.2 0.2 2.4 1.1 Dividends (1.0) (0.9) (2.8) (2.6) Common Stock Repurchases (3.0) (3.4) (9.0) (11.5) 0.3 0.5 1.2 (2.5) (3.7) (8.2) (10.9) 0.0 (0.6) (0.2) (0.3) $1.0 ($0.4) $0.0 $0.6 Net Income from Operations Working Capital / Other Global Financing A/R Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred 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 www.ibm.com/investor 2.0 26 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 27 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. Workforce Rebalancing Management presents certain financial results excluding the effects of charges in connection with workforce rebalancing actions. Management believes that presenting financial information regarding pre-tax income, pre-tax income margin, and SG&A expense 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. Retail Store Solutions (RSS) divestiture In the third quarter, the company completed the first two phases of the sale of its RSS business. 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. www.ibm.com/investor 28 Supplemental Materials Non -GAAP Supplemental Materials Non-GAAP Reconciliation of Operating Earnings Per Share 2012 Expectations IBM GAAP EPS $14.29+ IBM Operating EPS (Non-GAAP) $15.10+ Adjustments Acquisition-Related Charges * $0.47 Amortization of Purchased Intangibles $0.45 Other Acquisition-Related Charges $0.02 Non-Operating Retirement-Related Items ** $0.34 * Includes acquisitions closed as of 9/30/2012 ** Includes $0.11 charge in 3Q 2012 for additional obligation associated with UK pension plan The above serves to reconcile the Non-GAAP financial information contained in “3Q 2012” and “3Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 27 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 29 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 3Q 2012 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $11,732 $95 $67 $11,894 SG&A 5,908 RD&E 1,534 (196) 5,625 0 5 1,539 (606) (5) 0 Total Operating Expense & Other Income 6,657 (92) Pre-Tax Income 5,074 Tax *** Other Income & Expense (88) (611) (191) 6,374 188 258 5,520 1,251 47 67 1,364 Net Income 3,824 141 191 4,155 Diluted Earnings Per Share $3.33 $0.12 $0.17 $3.62 * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges. ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance. ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2012,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 27 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 Operating (Non-GAAP) Bridge – 3Q 2011 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,173 $87 ($7) $12,253 (0) 5,587 22 1,568 SG&A 5,662 RD&E 1,546 Other Income & Expense (75) 0 128 (18) 0 111 Total Operating Expense & Other Income 7,146 (92) 21 7, 075 Pre-Tax Income 5,027 180 (29) 5,178 Tax *** 1,188 47 (11) 1,224 Net Income 3,839 133 (17) 3,954 Diluted Earnings Per Share $3.19 $0.11 ($0.01) $3.28 * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2012,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 27 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 Reconciliation of Operating EPS Bridge 3Q11 to 3Q12 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) 3Q11 EPS $3.19 0.11 (0.01) $3.28 Revenue growth @ actual (0.17) 0.00 0.00 (0.17) Margin expansion 0.16 0.00 0.17 0.34 Share repurchases 0.15 0.01 0.01 0.17 $3.33 0.12 0.17 $3.62 3Q12 EPS * Includes amortization of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges. ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance. The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 3Q11 to 3Q12” discussion in the company’s earnings presentation. See Slide 27 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 Reconciliation of Operating EPS Bridge 1H11 to 1H12 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) 1H11 EPS $5.30 0.20 0.00 $5.50 Revenue growth @ actual (0.08) (0.01) 0.00 (0.09) Margin expansion 0.42 0.02 0.12 0.56 Share repurchases 0.31 0.01 0.00 0.32 $5.95 0.22 0.12 $6.29 1H12 EPS * Includes amortization of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges. ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance. The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 1H11 to 1H12” discussion in the company’s earnings presentation. See Slide 27 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 33 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth Japan North America - Software Russia India China Brazil Growth Markets – ITS Japan – GBS North America – GBS Europe – GBS Tivoli Storage Software Tivoli Security Total Systems (including RSS) Growth Markets @CC As Rptd 3Q12 Yr/Yr (1%) Flat 4% 4% 10% 11% (6%) 13% 20% 19% (17%) (3%) 9% 13% 1% 2% (6%) (6%) (13%) (6%) 9% 14% 6% 9% (11%) (9%) YTD 3Q12 Yr/Yr 3% 7% The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2012,” “Revenue by Geography,” “Services Segments,” “Software Segment,” “Systems and Technology Segment,” “Growth Initiatives,” and “3Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 27 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 GAAP to Operating (Non-GAAP) Bridge – 3Q 2012 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 47.4% 0.4 pts 0.3 pts 48.1% PTI Margin 20.5% 0.8 pts 1.0 pts 22.3% Tax Rate *** 24.6% 0.0 pts 0.1 pts 24.7% Net Income Margin 15.5% 0.6 pts 0.8 pts 16.8% * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” and “Revenue and Gross Profit Margin by Segment” discussions in the company’s earnings presentation. See Slide 27 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 GAAP to Operating (Non-GAAP) Bridge – 3Q 2011 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 46.5% 0.3 pts 0.0 pts 46.8% PTI Margin 19.2% 0.7 pts (0.1 pts) 19.8% Tax Rate *** 23.6% 0.1 pts (0.1 pts) 23.6% Net Income Margin 14.7% 0.5 pts (0.1 pts) 15.1% * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussions in the company’s earnings presentation. See Slide 27 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 Reconciliation of B/(W) Yr/Yr Expense Drivers – 3Q12 GAAP Non-GAAP Adjustments Operating (Non-GAAP) 4 pts 0 pts 4 pts Acquisitions (3 pts) 0 pts (2 pts) Base (6 pts) 3 pts (3 pts) 3 pts 0 pts 3 pts (4 pts) 0 pts (4 pts) 2 pts 1 pts 3 pts 7 pts 0 pts 8 pts (3 pts) 0 pts (3 pts) 2 pts 3 pts 5 pts SG&A Currency RD&E Currency Acquisitions Base 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 27 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 Reconciliation of Free Cash Flow (excluding GF Receivables) $ in Billions Net Cash from Operations 12 months ended 9/30/12 3 months ended 9/30/11 $20.3 $4.7 Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) (1.7) (0.2) 22.0 4.5 (4.4) $17.6 (1.0) $3.5 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics,” and “Free Cash Flow Bridge – 3Q11 to 3Q12” discussion in the company’s earnings presentation. See Slide 28 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 38 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Debt-to-Capital Ratio Sept. 11 Dec. 11 Sept. 12 Non-Global Financing Debt / Capital 28% 32% 36% IBM Consolidated Debt / Capital 57% 61% 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 28 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 39 www.ibm.com/investor 40