4Q 2013 Earnings Presentation January 21, 2014 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/4q13/ The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated January 21, 2014. www.ibm.com/investor 2 2013 Summary Revenue @CC Operating (Non-GAAP) EPS 4Q13 $ Yr/Yr $27.7 (5%) (3%) $6.13 14% FY13 $ $99.8 $16.28 Yr/Yr (5%) (2%) 7% Momentum in key growth areas drives mix to higher value Software and GBS • Software growth across the portfolio • Services revenue performance stable, growth led by GBS Hardware impacted by product cycle and business model challenges Maintained high investment level, targeted to key growth areas Expanded gross and net margins • Improving business mix • Ongoing productivity initiatives • Lower tax rate Significant shareholder returns Continue to expect at least $20 Operating EPS in 2015 www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights Revenue 4Q13 B/(W) Yr/Yr $27.7 (5%) @CC P&L Ratios (Operating) 4Q13 B/(W) Yr/Yr GP Margin 52.6% 0.3 pts (3%) PTI Margin 26.8% (0.8 pts) PTI – Operating $7.4 (8%) Tax Rate 11.0% 13.5 pts NI – Operating $6.6 8% NI Margin 23.9% 3.0 pts $6.13 14% EPS – Operating Cash Highlights 4Q13 Last 12 Mos. $8.4 $15.0 Share Repurchase (Gross) 5.8 13.9 Dividends 1.0 4.1 Free Cash Flow (excl GF Receivables) Cash Balance @ Dec. 31 11.1 www.ibm.com/investor 4 Revenue by Geography $ in Billions 4Q13 Americas $12.2 Europe/ME/A 9.2 Asia Pacific 5.9 B/(W) Yr/Yr Rptd @CC (3%) 1% (16%) (2%) (2%) (6%) Total Geographies $27.2 (5%) (3%) IBM $27.7 (5%) (3%) Major Markets (3%) (2%) Growth Markets (9%) (6%) (14%) (11%) BRIC Countries Canada/ LA www.ibm.com/investor EMEA U.S. -3% Japan APac +4% @CC OEM -33% 5 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions 4Q13 Global Technology Services $9.9 B/(W) Yr/Yr Rptd @CC 4Q13 B/(W) Yr/Yr Pts (4%) (1%) 38.8% 1.2 pts Global Business Services 4.7 1% 4% 30.7% 0.7 pts Software 8.1 3% 4% 90.5% (0.1 pts) Systems & Technology 4.3 (26%) 38.6% (5.5 pts) Global Financing 0.5 Flat 3% 43.3% (0.4 pts) (3%) 52.6% 0.3 pts Total Revenue & Op. GP Margin $27.7 (5%) (25%) Margin expansion driven by Services and mix to Software www.ibm.com/investor 6 Expense Summary B/(W) Yr/Yr Drivers 4Q13 B/(W) Yr/Yr Currency Acq.* Base SG&A – Operating $5.8 Flat 2 pts (2 pts) 0 pts RD&E – Operating 1.6 0 pts (2 pts) 3 pts 2 pts (2 pts) 1 pts $ in Billions 2% IP and Development Income (0.2) (12%) Other (Income)/Expense (0.1) 126% Interest Expense Operating Expense & Other Income 0.1 $7.1 (4%) 1% * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges Within base expense, productivity savings reinvested to growth areas www.ibm.com/investor 7 Services Segments Global Technology Services (GTS) $ in Billions 4Q13 $9.9 38.8% $2.0 19.5% Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin Global Business Services (GBS) B/(W) Yr/Yr Rptd @CC (4%) (1%) 1.2 pts (2%) 0.4 pts 4Q13 Revenue $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin Yr/Yr GTS GTS Outsourcing Integrated Technology Services Maintenance Rptd (4%) (3%) (2%) @CC (1%) Flat Flat (7%) 3% (2%) 6% 2% 5% GBS GBS Outsourcing Consulting & Systems Integration Services Backlog 4Q13 $143B 4Q13 $4.7 30.7% $0.9 19.1% B/(W) Yr/Yr Rptd @CC 1% 4% 0.7 pts 12% 2.0 pts 4Q13 Revenue (% of Total Services) Maint. 12% GTS Outsourcing 39% GBS Outsourcing 7% ITS 17% GBS C&SI 25% Continued margin expansion www.ibm.com/investor 8 Software Segment $ in Billions 4Q13 $8.1 90.5% $4.2 47.0% Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 4Q13 Revenue Yr/Yr Rptd @CC 14% 15% Information Management 5% 5% Tivoli 1% 1% Social Workforce Solutions 2% 3% Flat 1% Key Branded Middleware 5% 6% Total Middleware 4% 4% Total Software 3% 4% WebSphere Family Rational B/(W) Yr/Yr Rptd @CC 3% 4% (0.1 pts) 6% 1.0 pts 4Q13 Revenue (% of Total Software) Key Branded Middleware 71% Other Middleware 14% Operating Systems Other 9% 6% Growth across the Branded Middleware portfolio www.ibm.com/investor 9 Systems & Technology Segment B/(W) Yr/Yr $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 4Q13 Revenue System z Power Systems System x Storage Total Systems Microelectronics OEM Total Systems & Technology 4Q13 Rptd @CC $4.3 38.6% $0.2 4.7% (26%) (5.5 pts) (79%) (11.7 pts) (25%) Yr/Yr Rptd (37%) (31%) (16%) (13%) (25%) (33%) (26%) @CC (37%) (31%) (15%) (12%) (25%) (33%) (25%) 4Q13 Revenue (% of Total Sys & Tech) Servers 69% Storage 22% System z product cycle; business model challenges in other brands www.ibm.com/investor 10 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 4Q13 B/(W) Yr/Yr FY13 B/(W) Yr/Yr $6.5 $0.2 $17.5 ($2.1) (2.9) 1.2 9.5 (1.0) 18.8 (1.1) (0.1) (3.8) 8.4 (1.1) 15.0 Acquisitions (0.5) 1.0 (3.1) 0.7 Divestitures 0.1 0.0 0.3 (0.3) Dividends (1.0) (0.1) (4.1) (0.3) Share Repurchases (Gross) (5.8) (2.8) (13.9) (1.9) 1.6 3.2 3.2 2.5 (1.9) 1.7 2.4 3.2 Net Cash from Operations (1.3) 1.6 (3.7) (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 $0.8 www.ibm.com/investor $2.0 ($0.1) 0.5 (3.2) $0.7 11 Balance Sheet Summary Dec. 12 Dec. 13 $11.1 $11.1 Non-GF Assets* 70.6 76.5 Global Financing Assets 37.5 38.7 119.2 126.2 Other Liabilities 67.0 63.6 Non-GF Debt* 8.8 12.2 24.5 27.5 33.3 39.7 100.2 103.3 19.0 22.9 36% 39% 7.0 7.2 $ in Billions Cash & Marketable Securities Total Assets Global Financing Debt Total Debt Total Liabilities Equity Non-GF Debt / Capital Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 12 2015e At least $20 FY 2013 Summary Continued momentum in key growth areas 2014e $18.00+ 2013 $16.28 2012 $15.25 2011 $13.44 2010 • Smarter Planet ~20% yr/yr • Business Analytics +9% yr/yr • Cloud 69% yr/yr Delivered profit growth in Software, Services and Financing, while Hardware declined $11.67 Invested in innovation and continued portfolio transformation • Maintained high levels of investment – R&D $6B, Capital $4B, Acquisitions $3B – Strengthened capabilities in analytics, social, mobile, cloud, security • Announced divestiture of customer care BPO business Significant shareholder returns • Share repurchase (gross) $14B, Dividends $4B Operating EPS Expect at least $18.00 Operating EPS in 2014 www.ibm.com/investor 13 www.ibm.com/investor 14 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 Operating EPS Bridge – 4Q12 to 4Q13 and FY12 to FY13 Key Financial Metrics – FY 2013 Revenue by Geography – FY 2013 Revenue and Gross Profit Margin by Segment – FY 2013 Revenue by Key Industry Sales Unit – 4Q and FY 2013 Expense Summary – FY 2013 Cash Flow (FAS 95) Retirement-Related Charges Retirement-Related Charges 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 – 4Q 2013 • GAAP to Operating (Non-GAAP) Bridge – 4Q 2012 • GAAP to Operating (Non-GAAP) Bridge – FY 2013 • GAAP to Operating (Non-GAAP) Bridge – FY 2012 • GAAP to Operating (Non-GAAP) Bridge – 4Q 2013 and 4Q 2012 • GAAP to Operating (Non-GAAP) Bridge – FY 2013 and FY 2012 • Reconciliation of B/(W) Yr/Yr Expense Drivers – 4Q13 • Reconciliation of B/(W) Yr/Yr Expense Drivers – FY13 • Reconciliation of Operating EPS Bridge 4Q12 to 4Q13 • Reconciliation of Operating EPS Bridge FY12 to FY13 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Free Cash Flow (excluding GF Receivables) – 3 months ended 9/30/13 • Reconciliation of Revenue Growth • Reconciliation of Consolidated EPS www.ibm.com/investor 15 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ Yr/Yr @ 1/17 Spot 2Q14 3Q14 4Q14 3Q13 Yr/Yr 4Q13 Yr/Yr 1/17 Spot Euro 0.75 6% 0.73 5% 0.74 3% 4% 2% 0% 2% Pound 0.64 (2%) 0.62 1% 0.61 6% 7% 6% 2% 5% (26%) 100 (6%) (5%) (4%) (7%) Yen 99 IBM Revenue Impact (2.5 pts) Revenue As Reported Currency Impact Revenue @CC (24%) (2 pts) (US$B) Yr/Yr $27.7 (5%) 104 1Q14 (13%) FY14 ~(2 pts) ~(0-1 pts) ~0 pts ~(1 pts) ~(1 pts) (0.6) (2 pts) (3%) www.ibm.com/investor 16 Supplemental Materials Supplemental Segment Information – 4Q 2013 Global Services Revenue Global Services Backlog / Signings Revenue Growth Yr/Yr @CC GTS Outsourcing (4%) (1%) Integrated Tech Services (3%) Flat Maintenance (2%) Flat (4%) (1%) Total GTS $ in Billions Total Backlog GBS C&SI Total GBS (7%) (2%) 3% 6% 1% 4% 4Q13 Yr/Yr @CC $143 2% 5% 1% 5% Change in Backlog due to Currency Quarter-to-Quarter ($1) Year-to-Year ($4) Outsourcing Backlog GBS Outsourcing Backlog $91 Signings Outsourcing 4Q13 Yr/Yr @CC $9.3 11% 15% 8.2 (14%) (11%) $17.5 (2%) - GTS O/S, GBS O/S (AMS) Total Outsourcing (5%) (1%) Total Transactional Flat 4% (2%) Flat Maintenance Transactional - ITS, Consulting & AMS SI (incl. US Federal) Total Signings 1% Note: Actual backlog calculated using December 31 currency spot rates www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 4Q 2013 Systems & Technology Software Revenue Growth Revenue Growth Yr/Yr @CC GP% System z (37%) (37%) Power Systems (31%) (31%) System x (16%) (15%) Storage (13%) (12%) Total Systems (25%) (25%) Microelectronics OEM (33%) (33%) Total Sys & Tech (26%) (25%) Yr/Yr @CC 14% 15% Information Management 5% 5% Tivoli 1% 1% Social Workforce Sols. 2% 3% Flat 1% 5% 6% (5%) (4%) 4% 4% (3%) (2%) Other Software/Services 1% 2% Total Software 3% 4% Share WebSphere Family = Rational Key Branded Middleware Other Middleware Total Middleware Operating Systems www.ibm.com/investor 18 Supplemental Materials Global Financing Portfolio 4Q13 – $31.9B Net External Receivables Investment Grade 59% Non-Investment Grade 41% 40% 30% 20% 10% 38% 21% 20% 7% 12% 2% 0% AAA to A- BBB+ to BBB- BB+ to BB B to B- CCC+ to D 4Q13 3Q13 4Q12 Identified Loss Rate 0.8% 1.0% 0.8% Anticipated Loss Rate 0.4% 0.3% 0.4% Reserve Coverage 1.2% 1.3% 1.2% 3.3 3.0 2.5 $ 43 M $ 44 M $ 22 M Client Days Delinquent Outstanding Commercial A/R > 30 Days 19 BB- to B+ www.ibm.com/investor 19 Supplemental Materials Operating EPS Bridge 4Q12 to 4Q13 $5.39 ($0.29) $0.73 4Q12 Operating EPS Revenue Growth @ Actual Margin Expansion FY12 to FY13 $15.25 ($0.69) $0.98 FY12 Operating EPS Revenue Growth @ Actual Margin Expansion www.ibm.com/investor $0.30 Share Repurchases $0.74 Share Repurchases $6.13 4Q13 Operating EPS $16.28 FY13 Operating EPS 20 Supplemental Materials Key Financial Metrics – FY 2013 $ in Billions, except EPS P&L Highlights Revenue FY13 B/(W) Yr/Yr $99.8 (5%) @CC P&L Ratios (Operating) FY13 B/(W) Yr/Yr GP Margin 49.7% 0.9 pts (2%) PTI Margin 21.4% (0.7 pts) PTI – Operating $21.4 (8%) Tax Rate 16.0% 7.9 pts EPS – Operating $16.28 7% NI Margin 18.0% 1.1 pts Cash Highlights FY13 Free Cash Flow (excl GF Receivables) Share Repurchase (Gross) Dividends $15.0 13.9 4.1 Cash Balance @ Dec. 31 www.ibm.com/investor 11.1 21 Supplemental Materials Revenue by Geography – FY 2013 $ in Billions FY13 Americas $43.2 B/(W) Yr/Yr Rptd @CC (3%) (2%) Europe/ME/A 31.6 Flat (2%) Asia Pacific 22.9 (12%) (3%) $97.8 (4%) (2%) Total Geographies (5%) (2%) Major Markets (4%) (2%) Growth Markets (5%) (2%) (8%) (6%) IBM $99.8 BRIC Countries www.ibm.com/investor Canada/ LA EMEA U.S. -3% Japan APac +4% @CC OEM -13% 22 Supplemental Materials Revenue and Gross Profit Margin by Segment – FY 2013 Operating Gross Profit Margin Revenue FY13 B/(W) Yr/Yr Rptd @CC $38.6 (4%) Global Business Services 18.4 Software 25.9 Systems & Technology 14.4 $ in Billions Global Technology Services Global Financing Total IBM 2.0 $99.8 FY13 B/(W) Yr/Yr Pts (1%) 38.1% 1.5 pts (1%) 3% 30.9% 0.9 pts 2% 3% 88.8% 0.1 pts 35.6% (3.5 pts) 3% 45.6% (0.9 pts) (2%) 49.7% 0.9 pts (19%) (18%) Flat (5%) www.ibm.com/investor 23 Supplemental Materials Revenue by Key Industry Sales Unit – 4Q & FY 2013 B/(W) Yr/Yr Rptd @CC FY13 B/(W) Yr/Yr Rptd @CC $7.8 (3%) 1% $26.8 (1%) 2% Public 3.1 (7%) (6%) 11.6 (5%) (5%) Industrial 2.0 (7%) (4%) 7.6 (4%) (1%) Distribution 1.8 (6%) (5%) 6.6 (7%) (5%) Communications 1.8 (15%) (13%) 7.0 (11%) (10%) General Business 9.7 (3%) (1%) 34.7 (4%) (2%) $27.7 (5%) (3%) $99.8 (5%) (2%) $ in Billions 4Q13 Financial Services Total IBM * Reclassified to conform with 2013 presentation; reflects coverage model change in certain geographies www.ibm.com/investor 24 Supplemental Materials Expense Summary – FY 2013 B/(W) Yr/Yr Drivers Currency Acq.* Base FY13 B/(W) Yr/Yr SG&A – Operating $22.7 1% 1 pts (1 pts) 1 pts RD&E – Operating 6.2 2% 0 pts (2 pts) 4 pts 1 pts (2 pts) (1 pts) $ in Billions IP and Development Income (0.8) (23%) Other (Income)/Expense (0.3) (60%) 0.4 12% Interest Expense Operating Expense & Other Income $28.1 (1%) * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges www.ibm.com/investor 25 Supplemental Materials Cash Flow (FAS 95) $ in Billions 4Q13 4Q12 FY13 FY12 Net Income from Operations $6.2 $5.8 $16.5 $16.6 Depreciation / Amortization of Intangibles 1.2 1.2 4.7 4.7 Stock-based Compensation 0.2 0.2 0.6 0.7 Working Capital / Other 1.9 3.3 (3.0) 0.5 (2.9) (4.2) (1.3) (2.9) 6.5 6.3 17.5 19.6 (1.1) (1.0) (3.8) (4.3) 0.1 0.0 0.3 0.6 Acquisitions, net of cash acquired (0.5) (1.5) (3.1) (3.7) Marketable Securities / Other Investments, net (1.4) (1.7) (0.8) (1.6) (2.9) (4.1) (7.3) (9.0) 3.6 (0.2) 7.0 2.3 Dividends (1.0) (1.0) (4.1) (3.8) Common Stock Repurchases (Gross) (5.8) (3.0) (13.9) (12.0) Common Stock Transactions - Other 0.2 0.3 1.1 (3.0) (3.8) (9.9) 0.0 0.0 0.0 (0.1) $0.3 ($1.5) 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 Net Cash used in Financing Activities Effect of Exchange Rate changes on Cash Net Change in Cash & Cash Equivalents $0.6 www.ibm.com/investor ($1.5) 1.5 (12.0) 26 Supplemental Materials Retirement-Related Charges YE 2012 YE 2013 Funded Status* US WW 98% 94% 109% 102% Expected ROA WW 7.3% 7.2% Actual ROA WW 11.1% 7.1% Operating Discount Rate WW 3.4% 3.9% Non-Operating Pre-Tax Retirement-Related (Cost) / Income ($B) $0.5 $0.4 $0.1 $0.1 ($0.3) ($0.5) ($1.1) ($1.9) ($1.8) ($1.9) ($1.9) ($1.8) ($1.8) ($1.8) 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Retirement-Related Cash Drivers ($B) ($1.9) ($1.8) ($1.9) ($1.9) ($1.8) ($1.8) ($1.8) 2009 2010 * Tax-qualified plans 2011 2012 2013 2014 Actual 2015 ($1.4) ($1.6) ($1.7) ($1.5) 2009 2010 2011 Projection based on Dec ‘13 assumptions www.ibm.com/investor 2012 ($0.9) ($1.1) ($1.3) 2013 2014 2015 27 Supplemental Materials Retirement-Related Charges YE 2012 YE 2013 Upside Downside Funded Status* US WW 98% 94% 109% 102% Expected ROA WW 7.3% 7.2% 7.2% 7.2% Actual ROA WW 11.1% 7.1% 14.0% 0.0% Operating Discount Rate WW 3.4% 3.9% 4.4% 3.4% Non-Operating Pre-Tax Retirement-Related (Cost) / Income ($B) $0.5 $0.4 $0.1 $0.1 ($0.5) ~$1B Range ($0.3) ($1.1) ($1.9) ($1.8) ($1.9) ($1.9) ($1.8) ($1.8) ($1.8) 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Retirement-Related Cash Drivers ($B) ($0.9) ($1.9) ($1.8) ($1.9) ($1.9) ($1.8) ($1.8) ($1.8) 2009 2010 * Tax-qualified plans 2011 2012 Actual 2013 2014 2015 Projection based on Dec ‘13 assumptions ($1.4) ($1.6) ($1.7) ($1.5) 2009 2010 www.ibm.com/investor 2011 2012 Upside Case 2013 ($1.1) ($1.3) 2014 2015 Downside Case 28 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 29 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 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 $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 30 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating Earnings Per Share 2014 Expectations IBM GAAP EPS $17.00 IBM Operating EPS (Non-GAAP) $18.00+ Adjustments Acquisition-Related Charges * $0.76 Amortization of Purchased Intangibles $0.73 Other Acquisition-Related Charges $0.03 Non-Operating Retirement-Related Items $0.24 * Includes acquisitions through December 31, 2013 The above serves to reconcile the Non-GAAP financial information contained in “FY 2013 Summary” discussion in the company’s earnings presentation. See Slide 29 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 GAAP to Operating (Non-GAAP) Bridge – 4Q 2013 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $14,315 $105 $154 $14,574 SG&A 5,989 RD&E 1,566 Other (Income) & Expense (113) (101) 0 (8) (90) 5,798 (14) 1,552 0 (121) Total Operating Expense & Other (Income) 7,353 (109) (104) 7,140 Pre-Tax Income 6,962 213 258 7,434 94 817 Tax *** 777 (55) Net Income 6,185 268 164 6,617 Diluted Earnings Per Share $5.73 $0.25 $0.15 $6.13 * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs ** 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 “2013 Summary” ,“Key Financial Metrics” and ”Expense Summary” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 32 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 4Q 2012 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $15,167 $100 $60 $15,327 SG&A 5,921 RD&E 1,580 Other (Income) & Expense (47) (91) (29) 0 6 (7) 0 Total Operating Expense & Other (Income) 7,336 (98) Pre-Tax Income 7,831 Tax *** 5,801 1,586 (54) (23) 7,215 198 83 8,112 1,998 (45) 30 1,983 Net Income 5,833 243 53 6,129 Diluted Earnings Per Share $5.13 $0.21 $0.05 $5.39 * 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 “2013 Summary,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 29 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 GAAP to Operating (Non-GAAP) Bridge – FY 2013 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $48,505 $394 $629 $49,527 (394) (376) 22,731 (57) 6,170 SG&A 23,502 RD&E 6,226 Other (Income) & Expense (327) 0 (16) Total Operating Expense & Other (Income) 28,981 (410) Pre-Tax Income 19,524 Tax *** Net Income Diluted Earnings Per Share 0 (343) (433) 28,137 804 1,062 21,390 3,041 57 333 3,431 16,483 747 729 17,959 $0.68 $0.66 $14.94 $16.28 * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs ** 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 “2013 Summary” , “Key Financial Metrics- FY 2013” and “FY 2013 Summary” discussions in the company’s earnings presentation. See Slide 29 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 – FY 2012 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $50,298 $376 $264 $50,938 (349) (294) SG&A 23,553 RD&E 6,302 Other (Income) & Expense (843) 0 (13) 20 0 22,910 6,322 (857) Total Operating Expense & Other (Income) 28,396 (363) (274) 27,760 Pre-Tax Income 21,902 739 538 23,179 5,298 98 156 5,552 Net Income 16,604 641 381 17,627 Diluted Earnings Per Share $14.37 $0.55 $0.33 $15.25 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 “2013 Summary”, “ Key Financial Metrics – FY 2013” and “FY 2013 Summary” discussions in the company’s earnings presentation. See Slide 29 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 – 4Q 2013 and 4Q 2012 4Q 2013 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 51.7% 0.4 pts 0.6 pts 52.6% PTI Margin 25.1% 0.8 pts 0.9 pts 26.8% Tax Rate *** 11.2% (1.1 pts) 0.9 pts 11.0% Net Income Margin 22.3% 1.0 pts 0.6 pts 23.9% Gross Profit Margin 51.8% 0.3 pts 0.2 pts 52.3% PTI Margin 26.7% 0.7 pts 0.3 pts 27.7% Tax Rate *** 25.5% (1.2 pts) 0.1 pts 24.4% Net Income Margin 19.9% 0.8 pts 0.2 pts 20.9% 4Q 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 ”2013 Summary” and “Key Financial Metrics” discussions in the company’s earnings presentation. See Slide 29 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 GAAP to Operating (Non-GAAP) Bridge – FY 2013 and FY 2012 FY 2013 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 48.6% 0.4 pts 0.6 pts 49.7% PTI Margin 19.6% 0.8 pts 1.1 pts 21.4% Tax Rate *** 15.6% (0.3 pts) 0.8 pts 16.0% Net Income Margin 16.5% 0.7 pts 0.7 pts 18.0% Gross Profit Margin 48.1% 0.4 pts 0.3 pts 48.7% PTI Margin 21.0% 0.7 pts 0.5 pts 22.2% Tax Rate *** 24.2% (0.4 pts) 0.1 pts 24.0% Net Income Margin 15.9% 0.6 pts 0.4 pts 16.9% FY 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 “2013 Summary” and “Key Financial Metrics –FY 2013” discussions in the company’s earnings presentation. See Slide 29 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 B/(W) Yr/Yr Expense Drivers – 4Q13 GAAP Non-GAAP Adjustments Operating (Non-GAAP) 2 pts 0 pts 2 pts Acquisitions (2 pts) 0 pts (2 pts) Base (1 pts) 1 pts 0 pts 0 pts 0 pts 0 pts (2 pts) 0 pts (2 pts) 2 pts 1 pts 3 pts 2 pts 0 pts 2 pts (2 pts) 0 pts (2 pts) 0 pts 1 pts 1 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 29 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 B/(W) Yr/Yr Expense Drivers – FY13 GAAP Non-GAAP Adjustments Operating (Non-GAAP) 1 pts 0 pts 1 pts (2 pts) 0 pts (1 pts) 1 pts 0 pts 1 pts 0 pts 0 pts 0 pts (2 pts) 0 pts (2 pts) 3 pts 1 pts 4 pts 1 pts 0 pts 1 pts Acquisitions (2 pts) 0 pts (2 pts) Base (1 pts) 0 pts (1 pts) SG&A Currency Acquisitions Base RD&E Currency Acquisitions Base Operating Expense & Other Income Currency The above serves to reconcile the Non-GAAP financial information contained in the “Expense Summary – FY 2013” discussion in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 39 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating EPS Bridge 4Q12 to 4Q13 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) 4Q12 EPS $5.13 $0.21 $0.05 $5.39 Revenue growth @ actual (0.28) (0.01) 0.00 (0.29) Margin expansion 0.60 0.04 0.09 0.73 Share repurchases 0.28 0.01 0.01 0.30 $5.73 $0.25 $0.15 $6.13 4Q13 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 – 4Q12 to 4Q13” discussion in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 40 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating EPS Bridge FY12 to FY13 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) $14.37 $0.55 $0.33 $15.25 (0.65) (0.03) (0.01) (0.69) Margin expansion 0.54 0.13 0.31 0.98 Share repurchases 0.68 0.03 0.03 0.74 $14.94 $0.68 $0.66 $16.28 FY12 EPS Revenue growth @ actual FY13 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 – FY12 to FY13” discussion in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 41 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Debt-to-Capital Ratio FY 13 FY 12 Non-Global Financing Debt / Capital 39% 36% IBM Consolidated Debt / Capital 63% 64% 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 30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 42 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Free Cash Flow (excluding GF Receivables) 3 months ended 9/30/13 $ in Billions Net Cash from Operations Less: Global Financing Receivables $3.8 0.5 Net Cash from Operations (excluding GF Receivables) 3.3 Net Capital Expenditures (1.0) Free Cash Flow (excluding GF Receivables) $2.2 The above serves to reconcile the Non-GAAP financial information contained in the “Cash Flow Analysis” discussion in the company’s earnings presentation. See Slide 30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 43 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth 4Q13 Yr/Yr Japan China Key Branded Middleware Latin America As Rptd (16%) (22%) @CC 4% (23%) FY13 Yr/Yr As Rptd (15%) 5% @CC 4% 6% 4Q12 Yr/Yr As Rptd @CC 13% 18% The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography,” “Software Segment” and “Revenue by Geography – FY 2013,” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 44 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation 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 Operating EPS The above serves to reconcile the Non-GAAP financial information contained in the “FY 2013 Summary” discussion in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 45 www.ibm.com/investor 46