3Q 2013 Earnings Presentation October 16, 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/3q13.phtml The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated October 16, 2013. www.ibm.com/investor 2 3Q 2013 Revenue $23.7B Operating (Non-GAAP) EPS $3.99 -4%, -2% yr/yr @CC 10% yr/yr Total Services returned to revenue growth @CC, led by GBS Software Key Branded Middleware grew mid-single digits @CC Hardware mainframe growth more than offset by declines in Power, System x and Storage Major markets yr/yr performance improved; growth markets declined Continued strong performance in growth initiatives that address key market trends • Smarter Planet revenue +20% YTD • Business Analytics +8% YTD • Cloud +>70% YTD; >$1B in revenue for first time in a quarter Expanded gross and net margins Continue to expect 2013 Operating EPS of at least $16.25, $16.90 excluding 2Q Workforce Rebalancing charge www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights Revenue @CC PTI – Operating NI – Operating EPS – Operating 3Q13 $23.7 $5.3 $4.4 $3.99 B/(W) Yr/Yr (4%) (2%) (4%) 6% 10% P&L Ratios (Operating) GP Margin 3Q13 49.1% B/(W) Yr/Yr 1.0 pts PTI Margin NI Margin Tax Rate 22.3% 18.5% 17.0% Flat 1.7 pts 7.7 pts Cash Highlights Free Cash Flow (excl GF Receivables) Share Repurchase (Gross) Dividends Cash Balance @ Sept. 30 3Q13 $2.2 1.9 1.0 10.2 www.ibm.com/investor Last 12 Mos. $16.1 11.1 4.0 4 Revenue by Geography $ in Billions 3Q13 Americas $10.3 B/(W) Yr/Yr Rptd @CC (1%) Europe/ME/A 7.3 Asia Pacific 5.5 (15%) (4%) $23.2 (4%) (2%) Total Geographies 1% (2%) (4%) (2%) Major Markets (3%) (1%) Growth Markets (9%) (5%) (15%) (12%) IBM $23.7 BRIC Countries Canada/ LA Flat EMEA U.S. -1% Japan APac +5% @CC OEM Flat Major markets yr/yr performance improved; growth markets declined www.ibm.com/investor 5 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions 3Q13 Global Technology Services $9.5 B/(W) Yr/Yr Rptd @CC 3Q13 B/(W) Yr/Yr Pts (4%) (1%) 39.0% 1.7 pts Global Business Services 4.6 Flat 5% 32.9% 1.8 pts Software 5.8 1% 2% 88.0% Flat Systems & Technology 3.2 33.6% (3.6 pts) Global Financing 0.5 Total Revenue & Op. GP Margin $23.7 (17%) (16%) 6% 9% 47.2% 1.4 pts (4%) (2%) 49.1% 1.0 pts Margin expansion driven by Services and mix to Software www.ibm.com/investor 6 Expense Summary $ in Billions SG&A – Operating 3Q13 B/(W) Yr/Yr $5.1 10% excl. Workforce Rebalancing** RD&E – Operating 1.5 6% (0.2) (37%) Other (Income)/Expense (0.1) (90%) excl. 3Q12 RSS Sale Gain*** Operating Expense & Other Income 2 pts (2 pts) 10 pts 0 pts (2 pts) 8 pts 1 pts (2 pts) 2 pts 3% IP and Development Income Interest Expense B/(W) Yr/Yr Drivers Currency Acq.* Base (62%) 0.1 22% $6.4 Flat * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges ** Excludes $407M of Workforce Rebalancing in 3Q12 and $13M in 3Q13 *** Excludes $447M Retail Store Solutions sale gain www.ibm.com/investor 7 Services Segments Global Technology Services (GTS) Global Business Services (GBS) B/(W) Yr/Yr $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 3Q13 Rptd @CC $9.5 (4%) (1%) 39.0% 1.7 pts $1.9 12% 19.4% 2.8 pts 3Q13 Revenue Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin Rptd (6%) (1%) (2%) @CC (3%) 2% Flat (2%) 1% 3% 5% 2% 6% GBS GBS Outsourcing Consulting & Systems Integration Services Backlog 3Q13 $141B 3Q13 Rptd @CC $4.6 Flat 5% 32.9% 1.8 pts $0.9 28% 20.0% 4.4 pts 3Q13 Revenue Yr/Yr GTS GTS Outsourcing Integrated Technology Services Maintenance B/(W) Yr/Yr $ in Billions (% of Total Services) Maint. 13% GTS Outsourcing 38% GBS Outsourcing 7% ITS 17% GBS C&SI 25% Total Services returned to revenue growth @CC www.ibm.com/investor 8 Software Segment B/(W) Yr/Yr $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 3Q13 Revenue Rptd @CC $5.8 1% 2% 88.0% Flat $2.4 2% 36.8% 1.2 pts Yr/Yr Rptd @CC Flat 1% Information Management 2% 3% Tivoli 2% 3% Social Workforce Solutions 14% 15% Rational 12% 14% Key Branded Middleware 3% 4% Total Middleware 1% 2% Total Software 1% 2% WebSphere Family 3Q13 3Q13 Revenue (% of Total Software) Key Branded Middleware 64% Other Middleware 18% Operating Systems Other 10% 8% Mid-single digit growth in Key Branded Middleware www.ibm.com/investor 9 Systems & Technology Segment B/(W) Yr/Yr $ in Billions 3Q13 Rptd @CC $3.2 (17%) (16%) Gross Margin (External) 33.6% (3.6 pts) Pre-Tax Income ($0.2) nm PTI Margin (4.9%) Revenue (External) (7.9 pts) 3Q13 Revenue 3Q13 Revenue System z Power Systems System x Storage Total Systems Microelectronics OEM Total Systems & Technology Yr/Yr Rptd 6% (38%) (18%) (11%) (19%) 1% (17%) @CC 7% (37%) (16%) (10%) (18%) 1% (16%) (% of Total Sys & Tech) Servers 65% Storage 20% System z driven by double-digit growth in major markets; other brands declined www.ibm.com/investor 10 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 3Q13 B/(W) Yr/Yr YTD 3Q13 B/(W) Yr/Yr $3.8 ($0.8) $11.0 ($2.3) 0.5 0.2 1.6 0.4 3.3 (0.9) 9.3 (2.7) (1.0) 0.0 (2.7) 0.6 2.2 (0.9) 6.6 (2.0) Acquisitions (2.4) (2.0) (2.6) (0.3) Divestitures 0.2 (0.3) 0.2 (0.3) Dividends (1.0) (0.1) (3.0) (0.2) Share Repurchases (Gross) (1.9) 1.1 (8.1) 0.9 Non-GF Debt 1.4 0.7 1.6 (0.7) Other (includes GF A/R & GF Debt) 1.4 0.4 4.3 1.5 Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Change in Cash & Marketable Securities ($0.1) www.ibm.com/investor ($1.2) ($0.9) ($1.2) 11 Balance Sheet Summary Sept. ‘12 Dec. ‘12 Sept. ‘13 $12.3 $11.1 $10.2 Non-GF Assets* 71.2 70.6 73.0 Global Financing Assets 32.3 37.5 34.7 115.8 119.2 117.8 Other Liabilities 60.4 67.0 61.7 Non-GF Debt* 10.3 8.8 10.4 Global Financing Debt 23.3 24.5 25.8 33.7 33.3 36.2 Total Liabilities 94.1 100.2 97.8 Equity 21.7 19.0 20.0 36% 36% 39% 7.1 7.0 7.1 $ in Billions Cash & Marketable Securities Total Assets Total Debt Non-GF Debt / Capital Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 12 Operating EPS Bridge – 3Q12 to 3Q13 $3.62 ($0.15) 3Q12 Operating EPS Revenue Growth @ Actual $0.35 Margin Expansion www.ibm.com/investor $0.17 Share Repurchases $3.99 3Q13 Operating EPS 13 3Q 2013 Summary At Least $20 Operating PTI / EPS * At Least $16.25 Segment Operating PTI Operating EPS $15.25 $3.32 '00 '01 '02 '03 '04 '05 '06 Hardware / Financing '07 '08 '09 '10 Services '11 '12 '13e '14e '15e Software * Non-GAAP: Excludes acquisition-related charges and non-operating retirement-related charges 2000 & 2001 segments not restated for stock based compensation; 2000-2010 Segment PTI is reclassified to conform with 2012 operating presentation Sum of external segment pre-tax income not equal to IBM pre-tax income Continue to expect 2013 Operating EPS of at least $16.25, $16.90 excluding 2Q Workforce Rebalancing charge www.ibm.com/investor 14 www.ibm.com/investor 15 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 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 – 3Q 2013 • • • • GAAP to Operating (Non-GAAP) Bridge – 3Q 2012 Reconciliation of Operating EPS Bridge – 3Q 2012 to 3Q 2013 GAAP to Operating (Non-GAAP) Bridge – 3Q 2013 and 3Q 2012 Reconciliation of B/(W) Yr/Yr Expense Drivers – 3Q 2013 • • Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 9/30/13, 3 months ended 9/30/12 Reconciliation of Revenue Growth • • • Reconciliation of Debt-to-Capital Ratio Global Financing Return on Equity – 3Q 2013 Reconciliation of Consolidated EPS www.ibm.com/investor 16 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ 1Q13 Yr/Yr 2Q13 Yr/Yr 3Q13 Yr/Yr Euro 0.76 1% 0.77 2% 0.75 6% Pound 0.65 (1%) 0.65 (3%) 0.64 (2%) Yen Impact 92 (16%) 99 (2 pts) (23%) (2 pts) 3Q13 Revenue As Reported Currency Impact Revenue @CC 99 (26%) 10/15 Spot 4Q13 FY13 0.74 4% 0.63 99 (2.5 pts) (US$B) Yr/Yr $23.7 (4%) 10/15 Spot 1Q14 2Q14 3% 2% 3% (1%) (2%) 3% 4% (21%) (22%) (7%) 0% ~(2 pts) (2 pts) ~(1 pts) 0-1 pts (0.6) (2.5 pts) (2%) www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 3Q 2013 Global Services Revenue Global Services Backlog / Signings Revenue Growth Yr/Yr @CC GTS Outsourcing (6%) (3%) Integrated Tech Services (1%) 2% Maintenance (2%) Flat (4%) (1%) Total GTS $ in Billions Total Backlog GBS C&SI Total GBS (2%) 3% 1% 5% Flat 5% 3Q13 Yr/Yr @CC $141 2% 6% 1% 4% Change in Backlog due to Currency Quarter-to-Quarter Year-to-Year Outsourcing Backlog GBS Outsourcing Backlog $3 ($4) $90 Signings 3Q13 Outsourcing $6.1 Yr/Yr @CC (17%) (14%) - GTS O/S, GBS O/S (AMS) Total Outsourcing (6%) (2%) Total Transactional Flat 4% (2%) Flat Maintenance Transactional 6.2 5% 8% (7%) (4%) - ITS, Consulting & AMS SI (incl. US Federal) Total Signings $12.3 Note: Actual backlog calculated using September 30 currency spot rates www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 3Q 2013 Systems & Technology Software Revenue Growth Revenue Growth System z Yr/Yr @CC 6% 7% GP% (38%) (37%) System x (18%) (16%) Storage (11%) (10%) (19%) (18%) Total Systems Microelectronics OEM Total Sys & Tech 1% (17%) = = @CC Flat 1% Information Management 2% 3% Tivoli 2% 3% Social Workforce Sols. 14% 15% Rational 12% 14% 3% 4% (5%) (3%) 1% 2% (4%) (2%) Other Software/Services 1% 2% Total Software 1% 2% WebSphere Family = Power Systems Yr/Yr Share Key Branded Middleware Other Middleware 1% (16%) Total Middleware Operating Systems www.ibm.com/investor 19 Supplemental Materials Pre-Tax Income by Segment Segment PTI $ Segment PTI Margin $ in Billions 3Q13 PTI $ B/(W) Yr/Yr $1.9 12% Global Business Services 0.9 28% Software 2.4 Global Technology Services Systems & Technology Global Financing (0.2) 0.5 B/(W) Yr/Yr Excl. WFR* 3Q13 PTI % B/(W) Yr/Yr B/(W) Yr/Yr Excl. WFR* 3% 19.4% 2.8 pts 1.4 pts 12% 20.0% 4.4 pts 2.0 pts 2% (1%) 36.8% 1.2 pts (0.2 pts) nm nm (4.9%) (7.9 pts) (9.0 pts) 4% 3% 48.7% (0.7 pts) (1.0 pts) * Yr/Yr excludes Workforce Rebalancing from both years for comparison purposes www.ibm.com/investor 20 Supplemental Materials Global Financing Portfolio 3Q13 – $27.9B Net External Receivables 50% Investment Grade 59% Non-Investment Grade 41% 40% 38% 30% 20% 21% 20% 10% 12% 7% 2% B to B- CCC+ to D 0% AAA to A- BBB+ to BBB- BB+ to BB 3Q13 2Q13 3Q12 Identified Loss Rate 1.0% 0.8% 0.9% Anticipated Loss Rate 0.3% 0.4% 0.4% Reserve Coverage 1.3% 1.2% 1.3% 3.0 3.4 2.9 $ 44 M $ 67 M $ 36 M Client Days Delinquent Outstanding Commercial A/R > 30 Days 21 BB- to B+ www.ibm.com/investor 21 Supplemental Materials Revenue by Key Industry Sales Unit $ in Billions 3Q13 Financial Services B/(W) Yr/Yr* Rptd @CC $6.4 (1%) 3% Public 2.9 (2%) (2%) Industrial 1.8 (2%) 2% Distribution 1.6 (6%) (5%) Communications 1.7 (13%) (12%) General Business 8.1 (5%) (3%) $23.7 (4%) (2%) Total IBM Industrial Distribution Public Comms Financial Services General Business * Reclassified to conform with 2013 presentation; reflects coverage model change in certain geographies www.ibm.com/investor 22 Supplemental Materials Cash Flow (FAS 95) $ in Billions QTD 3Q13 QTD 3Q12 YTD 3Q13 YTD 3Q12 Net Income from Operations $4.0 $3.8 $10.3 $10.8 Depreciation / Amortization of Intangibles 1.2 1.2 3.5 3.5 Stock-based Compensation 0.1 0.2 0.5 0.5 (2.1) (1.0) (4.9) (2.8) 0.5 0.3 1.6 1.2 3.8 4.5 11.0 13.2 (1.0) (1.0) (2.7) (3.3) 0.2 0.6 0.2 0.6 (2.4) (0.3) (2.6) (2.3) 0.6 (0.2) 0.6 0.1 (2.5) (1.0) (4.4) (4.9) 2.0 1.2 3.4 2.4 Dividends (1.0) (1.0) (3.0) (2.8) Common Stock Repurchases (1.9) (3.0) (8.1) (9.0) 0.2 0.3 0.8 1.2 (0.8) (2.5) (6.9) (8.2) 0.1 0.0 0.0 (0.2) $0.5 $1.0 Working Capital / Other Global Financing A/R 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 www.ibm.com/investor ($0.3) $0.0 23 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 24 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 25 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating Earnings Per Share 2013 Expectations IBM GAAP EPS $15.01+ IBM Operating EPS (Non-GAAP) $16.25+ 2013 Expectations excl. 2Q Workforce Rebal. $16.90+ Adjustments Acquisition-Related Charges * $0.58 Amortization of Purchased Intangibles $0.57 Other Acquisition-Related Charges $0.01 Non-Operating Retirement-Related Items $0.66 * Includes acquisitions through September 30, 2013 The above serves to reconcile the Non-GAAP financial information contained in “ 3Q 2013” and “3Q 2013 Summary” discussions in the company’s earnings presentation. See Slides 24-25 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 26 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 3Q 2013 $ in Millions, except EPS Gross Profit GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $11,380 $102 $154 $11,636 SG&A 5,255 RD&E 1,468 Other Income & Expense (62) (111) 0 (1) (89) 5,055 (14) 1,454 0 (63) Total Operating Expense & Other Income 6,567 (112) (103) 6,352 Pre-Tax Income 4,812 214 257 5,284 772 48 77 897 Net Income 4,041 166 181 4,387 Diluted Earnings Per Share $3.68 $0.15 $0.16 $3.99 Tax *** * 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 2013”, “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 24 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 Operating (Non-GAAP) Bridge – 3Q 2012 $ in Millions, except EPS Gross Profit GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $11,732 $95 $67 $11,894 SG&A 5,908 RD&E 1,534 Other Income & Expense (606) (88) (196) 0 5 (5) 0 Total Operating Expense & Other Income 6,657 (92) Pre-Tax Income 5,074 Tax *** 5,625 1,539 (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 2013”, “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 28 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating EPS Bridge – 3Q 2012 to 3Q 2013 Retirement-related Adjustments** GAAP Acquisitionrelated Adjustments* 3Q12 EPS $3.33 $0.12 $0.17 $3.62 Revenue growth @ actual (0.14) (0.00) (0.01) (0.15) Margin expansion 0.33 0.02 0.00 0.35 Share repurchases 0.16 0.01 0.00 0.17 $3.68 $0.15 $0.16 $3.99 3Q13 EPS Operating (Non-GAAP) * 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 – 3Q12 to 3Q13” discussion in the company’s earnings presentation. See Slide 24 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 2013 and 3Q 2012 3Q 2013 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 48.0% 0.4 pts 0.6 pts 49.1% PTI Margin 20.3% 0.9 pts 1.1 pts 22.3% Tax Rate *** 16.0% 0.3 pts 0.7 pts 17.0% Net Income Margin 17.0% 0.7 pts 0.8 pts 18.5% 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% 3Q 2012 * 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” , “Operating non-GAAP results” and “PreTax Income’ discussions in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 30 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of B/(W) Yr/Yr Expense Drivers – 3Q 2013 GAAP Non-GAAP Adjustments Operating (Non-GAAP) SG&A Currency 2 pts 0 pts 2 pts Acquisitions (2 pts) 0 pts (2 pts) Base 12 pts (1 pts) 10 pts RD&E Currency Acquisitions Base 0 pts 0 pts 0 pts (2 pts) 0 pts (2 pts) 7 pts 1 pts 8 pts 1 pts 0 pts 1 pts (2 pts) 0 pts (2 pts) 3 pts 1 pts 2 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 24 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 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 9/30/13 3 months ended 9/30/12 $17.3 $4.5 (2.5) 0.3 19.8 4.2 (3.7) $16.1 (1.0) $3.1 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 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 Reconciliation of Revenue Growth 2Q13 Yr/Yr Americas Europe/ME/A As Rptd @CC (3%) (3%) Flat (1%) Japan Major Markets (5%) 3Q13 Yr/Yr As Rptd @CC (17%) 5% (2%) China (20%) (22%) 3Q13 Yr/Yr China S&T Segment contribution to: As Rptd @CC IBM Growth Rate (1.1 pts) (1.2 pts) Growth Markets Growth Rate (4.3 pts) (4.9 pts) The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography,” “Software Segment,” and “Systems & Technology Segment” discussions in the company’s earnings presentation. See Slide 24 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 Debt-to-Capital Ratio Sept. 2013 Dec. 2012 Sept. 2012 Non-Global Financing Debt / Capital 39% 36% 36% IBM Consolidated Debt / Capital 64% 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 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 Global Financing Return on Equity – 3Q 2013 Numerator: Global Financing after tax income* Annualized after tax income (A) $333 $1,331 Denominator: Annualized Global Financing equity (B)** $3,543 Global Financing return on equity (A)/(B) 37.6% * Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis. ** Average of the ending equity for Global Financing for the three months ended September 30, 2013. The above serves to reconcile the Non-GAAP financial information contained in the “Revenue and Gross Profit Margin by Segment” discussion in the company’s earnings presentation. See Slide 24 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 Reconciliation of Consolidated EPS EPS (As Reported) AcquisitionRelated Non-Operating RetirementRelated 2000 $3.88 $0.05 ($0.62) 2012 14.37 0.55 0.33 Operating EPS $3.32 15.25 The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2013 Summary” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 36 www.ibm.com/investor 37