IBM REPORTS 2014 THIRD-QUARTER RESULTS NOTE: Results from continuing operations exclude discontinued Microelectronics business, to be acquired by GLOBALFOUNDRIES as announced today. o o o o o o o Diluted EPS from continuing operations: - GAAP: $3.46, down 8 percent; - Operating (non-GAAP): $3.68, down 10 percent; Net income from continuing operations: - GAAP: $3.5 billion, down 17 percent; - Operating (non-GAAP): $3.7 billion, down 18 percent; Consolidated results, including net loss on discontinued operations of $3.4 billion: - Net income: $18 million - EPS: $0.02 Gross profit margin from continuing operations: - GAAP: 48.6 percent, down 40 basis points; - Operating (non-GAAP): 49.2 percent, down 90 basis points; Revenue from continuing operations: $22.4 billion: - Down 4 percent; down 2 percent adjusting for divested customer care outsourcing business and currency; Strategic imperatives grew double digits year-to-date: - Cloud revenue up more than 50 percent year-to-date; -- For cloud delivered as a service, up 80 percent year-to-date with a third-quarter annual run rate of $3.1 billion; - Business analytics revenue up 8 percent year-to-date; - Mobile revenue more than doubled year-to-date; - Security revenue up more than 20 percent year-to-date; Impact of customer care outsourcing, industry standard server and Microelectronics business divestitures, based on full-year 2013: - Generated more than $7.0 billion of annual revenue; - Incurred more than $0.5 billion in annual pre-tax losses. ARMONK, N.Y., October 20, 2014 . . . IBM (NYSE: IBM) today announced thirdquarter 2014 diluted earnings from continuing operations of $3.46 per share, compared with diluted earnings of $3.77 per share in the third-quarter of 2013, a decrease of 8 percent. Operating (non-GAAP) diluted earnings from continuing operations were $3.68 per share compared with operating diluted earnings of $4.08 per share in the third-quarter of 2013, a decrease of 10 percent. Third-quarter net income from continuing operations was $3.5 billion compared with $4.1 billion in the third-quarter of 2013, a decrease of 17 percent. Operating (non-GAAP) net income from continuing operations was $3.7 billion, as compared with $4.5 billion in the third-quarter of 2013, a decrease of 18 percent. For the third-quarter of 2014, IBM reported consolidated net income of $18 million or $0.02 of diluted earnings per share, which includes a net loss from discontinued operations of $3.4 billion, or $3.44 per diluted common share. Total revenues from continuing operations for the third-quarter of 2014 of $22.4 billion were down 4 percent (down 2 percent, adjusting for the impact of the divested customer care outsourcing business and for currency) from the third-quarter of 2013. “We are disappointed in our performance. We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas – cloud, data and analytics, security, social and mobile - where we continue to shift our business. We will accelerate this transformation,” said Ginni Rometty, IBM chairman, president and chief executive officer. “We are executing on a clear strategy that is moving IBM to higher value, and we've taken significant actions to exit nonstrategic elements of the business. This includes the announcement that we will divest semiconductor manufacturing to focus on research and development that will differentiate our systems. We will continue to make the investments and the changes necessary to manage our business for the long term. And we remain fully committed to returning significant value to shareholders through dividends and share repurchase." Discontinued Operations The company has reached an agreement under which GLOBALFOUNDRIES will acquire IBM’s Microelectronics OEM semiconductor business and manufacturing operations. The transaction with GLOBALFOUNDRIES is expected to close in 2015. The results from continuing operations exclude the Microelectronics business, which is presented separately as discontinued operations. The loss from discontinued operations in the third quarter includes a nonrecurring pre-tax charge of $4.7 billion, or $3.3 billion, net of tax. The charge includes an impairment to reflect fair value less estimated costs to sell the Microelectronics business assets, which the company has classified as held for sale at September 30, 2014. The charge also includes other estimated costs related to the transaction, including cash consideration expected to be transferred to GLOBALFOUNDRIES of approximately $1.5 billion. The cash consideration is expected to be paid to GLOBALFOUNDRIES over the next three years and will be adjusted by the amount of the working capital due by GLOBALFOUNDRIES to IBM, estimated to be $0.2 billion. In addition, discontinued operations includes operational net losses from the Microelectronics business of $0.1 billion in both the third quarter of 2014 and the third quarter of 2013. Third-Quarter GAAP – Operating (non-GAAP) Reconciliation Third-quarter operating (non-GAAP) diluted earnings from continuing operations exclude $0.22 per share of charges; $0.16 per share for the amortization of purchased intangible assets and other acquisition-related charges; and $0.06 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance. Earnings Guidance The company will provide earnings guidance during today’s quarterly earnings conference call, and it is included in the presentation charts. Geographic Regions The Americas’ third-quarter revenues were $10.1 billion, a decrease of 2 percent (down 1 percent, adjusting for currency) from the 2013 period. Revenues from Europe/Middle East/Africa were down 2 percent to $7.2 billion (down 3 percent, adjusting for currency). Asia-Pacific revenues decreased 9 percent (down 8 percent, adjusting for currency) to $5.0 billion. Growth Markets Revenues from the company’s growth markets were down 6 percent (down 5 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were down 7 percent (down 7 percent, adjusting for currency). Services Global Services segment revenues decreased 3 percent (flat adjusting for the impact of the divested customer care outsourcing business and for currency) to $13.7 billion. Global Technology Services segment revenues decreased 3 percent (up 1 percent adjusting for the impact of the divested customer care outsourcing business and for currency) to $9.2 billion. Global Business Services segment revenues were down 2 percent (down 1 percent, adjusting for currency) to $4.5 billion. Pre-tax income from Global Technology Services decreased 11 percent and pre-tax margin decreased to 17.7 percent. Global Business Services pre-tax income decreased 15 percent and pre-tax margin decreased to 17.5 percent. The estimated services backlog at September 30, 2014 was $128 billion, down 7 percent year to year adjusting for the divested customer care outsourcing business (down 2 percent, adjusting for currency). Software Revenues from the Software segment were $5.7 billion, down 2 percent (down 2 percent, adjusting for currency) compared with the third-quarter of 2013. Software pre-tax income decreased 3 percent and pre-tax margin decreased to 35.5 percent. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.7 billion, down 1 percent (down 1 percent, adjusting for currency) versus the third-quarter of 2013. Operating systems revenues of $513 million were down 11 percent (down 11 percent, adjusting for currency) compared with the prior-year quarter. Financing Global Financing segment revenues decreased 3 percent (down 3 percent, adjusting for currency) in the third-quarter to $487 million. Pre-tax income for the segment decreased 4 percent to $475 million. Hardware Revenues from continuing operations from the Systems and Technology segment totaled $2.4 billion for the quarter, down 15 percent (down 15 percent, adjusting for currency) from the third-quarter of 2013. Systems and Technology pre-tax loss increased $91 million to a loss of $99 million. Revenues from Power Systems were down 12 percent compared with the 2013 period. Revenues from System x were down 10 percent. Revenues from System z mainframe server products decreased 35 percent compared with the year-ago period. Revenues from System Storage decreased 6 percent. Gross Profit The company’s total gross profit margin from continuing operations was 48.6 percent in the 2014 third-quarter period compared with 49.0 percent in the 2013 third-quarter period. Total operating (non-GAAP) gross profit margin from continuing operations was 49.2 percent in the 2014 third-quarter compared with 50.1 percent in the 2013 third-quarter period. Expense Total expense and other income from continuing operations increased 1 percent to $6.5 billion compared with the prior year period. S,G&A expense of $5.3 billion was flat year over year. R,D&E expense of $1.4 billion was flat compared with the yearago period. Intellectual property and custom development income decreased to $145 million compared with $191 million a year ago. Other (income) and expense was income of $103 million compared with prior-year income of $63 million. Interest expense increased to $126 million compared with $97 million in the prior year period. Total operating (non-GAAP) expense and other income from continuing operations increased 2 percent to $6.4 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense increased 2 percent to $5.1 billion compared with the prior-year period. Operating (non-GAAP) R,D&E expense of $1.4 billion was up 2 percent compared with the year-ago period. Pre-Tax Income Pre-tax income from continuing operations decreased 12 percent to $4.4 billion and pre-tax margin of 19.5 percent was down 1.8 points compared with the prior-year period. Operating (non-GAAP) pre-tax income decreased 15 percent to $4.6 billion and pre-tax margin was 20.7 percent, down 2.6 points, compared to the year-ago period. *** IBM’s tax rate from continuing operations was 20.8 percent, up 4.0 points year over year; operating (non-GAAP) tax rate was 20.8 percent, up 3.2 points compared to the year-ago period. The change in the third-quarter tax rate is driven by discrete benefits associated with foreign tax audits in the third-quarter 2013. Net income margin from continuing operations decreased 2.3 points to 15.4 percent. Total operating (non-GAAP) net income margin decreased 2.8 points to 16.4 percent. The weighted-average number of diluted common shares outstanding in the thirdquarter 2014 was 998 million compared with 1.10 billion shares in the same period of 2013. As of September 30, 2014, there were 990 million basic common shares outstanding. Debt, including Global Financing, totaled $45.7 billion, compared with $39.7 billion at year-end 2013. From a management segment view, Global Financing debt totaled $28.6 billion versus $27.5 billion at year-end 2013, resulting in a debt-toequity ratio of 7.4 to 1. Non-global financing debt totaled $17.1 billion, an increase of $4.8 billion since year-end 2013, resulting in a debt-to-capitalization ratio of 61.9 percent (higher than the ratio at year-end 2013). IBM ended the third-quarter 2014 with $9.6 billion of cash on hand and generated free cash flow of $2.2 billion, excluding Global Financing receivables, down approximately $0.1 billion year over year. In the third quarter of 2014, the company returned $2.8 billion to shareholders through $1.1 billion in dividends and $1.7 billion of gross share repurchases. At the end of September 2014, IBM had approximately $1.4 billion remaining from the current share repurchase authorization. The company expects to request an additional share repurchase authorization at the October 2014 board meeting. Year-To-Date 2014 Results Net income from continuing operations for the nine months ended September 30, 2014 was $10.2 billion compared with $10.7 billion in the year-ago period, a decrease of 4 percent. Diluted earnings per share from continuing operations were $10.09, up 5 percent compared to the 2013 period. The consolidated diluted earnings per share were $6.44 as compared to $9.27, down 31 percent as compared to the 2013 period. Revenues from continuing operations for the nine-month period totaled $68.7 billion, a decrease of 3 percent (down 3 percent, adjusting for currency) compared with $71.0 billion for the first nine months of 2013. Operating (non-GAAP) net income from continuing operations for the nine months ended September 30, 2014 was $10.9 billion compared with $11.7 billion in the yearago period, a decrease of 7 percent. Operating (non-GAAP) diluted earnings per share from continuing operations were $10.76 compared with $10.54 per diluted share for the 2013 period, an increase of 2 percent. Forward-Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. Presentation of Information in this Press Release In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors: IBM results and expectations -o presenting operating (non-GAAP) earnings per share from continuing operations amounts and related income statement items; o presenting non-global financing debt-to-capitalization ratio; o adjusting for free cash flow; o adjusting for currency (i.e., at constant currency). The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the third-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplemental Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC. Conference Call and Webcast IBM’s regular quarterly earnings conference call is scheduled to begin at 8:00 a.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/3q14.html. Presentation charts will be available shortly before the Webcast. Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts). INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, Percent Percent 2014 2013* Change 2014 2013* Change ------- ------------- ------- ------- ------REVENUE Global Technology Services Gross profit margin $9,218 38.5% $9,494 39.0% $28,634 37.9% -2.3% Global Business Services Gross profit margin 4,459 31.3% 4,558 32.9% -2.2% 13,476 30.4% 13,649 30.9% -1.3% Software Gross profit margin 5,708 87.6% 5,798 88.0% -1.6% 17,857 88.0% 17,792 88.0% 0.4% Systems and Technology Gross profit margin 2,434 33.9% 2,864 39.9% -15.0% 7,590 36.3% 9,041 40.2% -16.0% Global Financing Gross profit margin 487 47.8% 502 47.2% -3.2% 1,502 49.6% 1,488 46.4% 1.0% 92 -143.8% 122 -211.6% -24.3% 292 -162.5% 378 -185.3% -22.8% TOTAL REVENUE 22,397 23,338 -4.0% 68,680 70,982 -3.2% GROSS PROFIT Gross profit margin 10,874 48.6% 11,429 49.0% -4.9% 33,545 48.8% 34,347 48.4% -2.3% S,G&A Expense to revenue 5,281 23.6% 5,260 22.5% 0.4% 17,146 25.0% 17,463 24.6% -1.8% R,D&E Expense to revenue 1,354 6.0% 1,356 5.8% -0.1% 4,117 6.0% 4,291 6.0% -4.0% Intellectual property and custom development income (145) (191) -23.9% (543) (621) -12.5% Other (income) and expense (103) (63) 62.3% (433) (217) 99.3% 126 97 30.2% 367 289 26.9% TOTAL EXPENSE AND OTHER INCOME Expense to revenue 6,513 29.1% 6,458 27.7% 0.9% 20,654 30.1% 21,205 29.9% -2.6% INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Pre-tax margin 4,361 19.5% 4,972 21.3% -12.3% 12,891 18.8% 13,142 18.5% -1.9% Other Gross profit margin -2.9% $27,962 38.3% EXPENSE AND OTHER INCOME Interest expense Provision for income taxes Effective tax rate INCOME FROM CONTINUING OPERATIONS Net margin DISCONTINUED OPERATIONS Loss from discontinued operations, net of taxes NET INCOME EARNINGS PER SHARE OF COMMON STOCK: ASSUMING DILUTION CONTINUING OPERATIONS DISCOUNTINUED OPERATIONS TOTAL BASIC CONTINUING OPERATIONS DISCOUNTINUED OPERATIONS TOTAL WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's): ASSUMING DILUTION BASIC 906 20.8% 832 16.7% $3,455 15.4% 8.8% 2,655 20.6% 2,478 18.9% 7.1% $4,139 17.7% -16.5% $10,237 14.9% $10,665 15.0% -4.0% (3,437) (98) (3,698) (366) $18 ====== $4,041 ====== -99.6% $6,539 ====== $10,299 ======= -36.5% $3.46 ($3.44) ----$0.02 $3.77 ($0.09) ----$3.68 -8.2% $10.09 ($3.65) -----99.5% $6.44 $9.60 ($0.33) ----$9.27 5.1% $3.48 ($3.46) ----$0.02 $3.79 ($0.09) ----$3.70 $10.15 ($3.67) -----99.5% $6.48 $9.68 ($0.33) ----$9.35 997.7 991.8 1,098.8 1,090.9 1,014.9 1,008.9 1,110.7 1,101.8 -8.2% -30.5% 4.9% -30.7% * Reclassified to reflect discontinued operations presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited) (Dollars in Millions) At September 30, 2014 ------------ At December 31, 2013 ------------ ASSETS: Current Assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade (net of allowances of $316 in 2014 and $291 in 2013) Short-term financing receivables (net of allowances of $432 in 2014 and $308 in 2013) Other accounts receivable (net of allowances of $46 in 2014 and $36 in 2013) Inventories, at lower of average cost or market: $9,561 4 $10,716 350 9,122 10,465 17,411 19,787 1,469 1,584 Finished goods Work in process and raw materials Total inventories Deferred taxes Prepaid expenses and other current assets Total Current Assets Property, plant and equipment Less: Accumulated depreciation Property, plant and equipment - net Long-term financing receivables (net of allowances of $87 in 2014 and $80 in 2013) Prepaid pension assets Deferred taxes Goodwill Intangible assets - net Investments and sundry assets Total Assets 508 1,848 --------2,356 2,219 5,022 --------47,163 444 1,866 --------2,310 1,651 4,488 --------51,350 39,950 28,882 --------11,068 40,475 26,654 --------13,821 10,993 7,443 2,697 31,045 3,373 5,126 --------$118,911 ========= 12,755 5,551 3,051 31,184 3,871 4,639 --------$126,223 ========= $2,475 12,876 5,855 3,965 11,346 5,788 --------42,306 $4,633 6,862 7,461 3,893 12,557 4,748 --------40,154 32,821 32,856 15,093 3,683 10,613 --------104,515 16,242 4,108 9,934 --------103,294 52,446 133,403 (150,616) (20,978) --------14,255 51,594 130,042 (137,242) (21,602) --------22,792 140 --------14,395 --------$118,911 137 --------22,929 --------$126,223 LIABILITIES: Current Liabilities: Taxes Short-term debt Accounts payable Compensation and benefits Deferred income Other accrued expenses and liabilities Total Current Liabilities Long-term debt Retirement and nonpension postretirement benefit obligations Deferred income Other liabilities Total Liabilities EQUITY: IBM Stockholders' Equity: Common stock Retained earnings Treasury stock -- at cost Accumulated other comprehensive income/(loss) Total IBM stockholders' equity Noncontrolling interests Total Equity Total Liabilities and Equity ========= ========= INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited) (Dollars in Millions) Net Cash from Operating Activities per GAAP: Less: the change in Global Financing (GF) Receivables Net Cash from Operating Activities (Excluding GF Receivables) Capital Expenditures, Net Free Cash Flow (Excluding GF Receivables) Acquisitions Divestitures Dividends Share Repurchase Non-GF Debt Other (includes GF Receivables, and GF Debt) Change in Cash, Cash Equivalents and Short-term Marketable Securities Three Months Ended September 30, 2014 2013 -----------$3,904 $3,760 Nine Months Ended September 30, 2014 2013 ------------$10,809 $10,957 719 ------ 481 ------ 2,223 ------ 1,628 ------ 3,185 3,279 8,587 9,329 (1,008) (1,041) (2,803) (2,709) 2,177 2,238 5,783 6,620 (47) 81 (1,090) (1,719) (483) (2,382) 235 (1,037) (1,917) 1,351 (650) 489 (3,176) (13,547) 4,536 (2,562) 247 (3,033) (8,062) 1,556 925 1,388 5,065 4,337 ($156) ======== ($125) ======== ($1,501) ======= ($897) ======= INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) (Dollars in Millions) THIRD-QUARTER 2014 -------------------------------------------------------Pre-tax Income/ (Loss) ----------- Revenue -----------Continuing Pre-tax External Internal Total Operations Margin ------------------------------------- SEGMENTS Global Technology Services Y-T-Y change $9,218 -2.9% $252 -3.8% $9,470 -2.9% $1,680 -11.3% 17.7% Global Business Services Y-T-Y change 4,459 -2.2% 135 -23.7% 4,594 -3.0% 805 -15.0% 17.5% Software 5,708 862 6,570 2,333 35.5% Y-T-Y change Systems and Technology Y-T-Y change Global Financing Y-T-Y change TOTAL REPORTABLE SEGMENTS Y-T-Y change Eliminations / Other TOTAL IBM CONSOLIDATED Y-T-Y change -1.6% 15.9% 0.4% -3.2% 2,434 -15.0% 182 8.7% 2,616 -13.7% (99) NM -3.8% 487 -3.2% 598 16.7% 1,084 6.9% 475 -3.7% 43.9% $22,305 -3.9% $2,029 8.9% $24,334 -3.0% $5,195 -9.5% 21.3% 92 (2,029) (1,937) (835) $22,397 -4.0% $0 $22,397 -4.0% $4,361 -12.3% 19.5% THIRD-QUARTER 2013* -------------------------------------------------------Pre-tax Income/ (Loss) ----------- Revenue -----------Continuing Pre-tax External Internal Total Operations Margin ------------------------------------- (Dollars in Millions) SEGMENTS Global Technology Services $9,494 $262 $9,755 $1,895 19.4% Global Business Services 4,558 177 4,735 948 20.0% Software 5,798 744 6,542 2,410 36.8% Systems and Technology* 2,864 168 3,032 (8) -0.3% 502 512 1,015 494 48.7% $23,216 $1,863 $25,079 $5,738 22.9% 122 (1,863) (1,741) (766) $23,338 $0 $23,338 $4,972 Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED 21.3% * Reclassified to reflect discontinued operations presentation. NM = Not Meaningful INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) (Dollars in Millions) NINE-MONTHS 2014 ----------------------------------------------------Pre-tax Income/ (Loss) ---------- Revenue ----------Continuing Pre-tax External Internal Total Operations Margin -------- -------- -------- ---------- ------- SEGMENTS Global Technology Services Y-T-Y change $27,962 -2.3% $739 -7.8% $28,701 -2.5% $4,876 -2.4% 17.0% Global Business Services Y-T-Y change 13,476 -1.3% 416 -23.7% 13,892 -2.1% 2,266 -0.3% 16.3% Software Y-T-Y change 17,857 0.4% 2,652 14.7% 20,508 2.0% 6,935 1.0% 33.8% Systems and Technology Y-T-Y change 7,590 -16.0% 541 27.9% 8,131 -14.1% (354) 167.1% -4.4% 1,502 1.0% 1,900 16.7% 3,403 9.2% 1,664 5.2% 48.9% $68,387 -3.1% $6,248 9.4% $74,635 -2.2% $15,386 -1.3% 20.6% 292 (6,248) (5,955) (2,495) $68,680 -3.2% $0 $68,680 -3.2% $12,891 -1.9% Global Financing Y-T-Y change TOTAL REPORTABLE SEGMENTS Y-T-Y change Eliminations / Other TOTAL IBM CONSOLIDATED Y-T-Y change 18.8% NINE-MONTHS 2013* ----------------------------------------------------Pre-tax Income (Loss)/ -------- Revenue -----------Continuing Pre-tax External Internal Total Operations Margin -------- ----------------------------- (Dollars in Millions) SEGMENTS Global Technology Services $28,634 $801 $29,435 $4,994 17.0% Global Business Services 13,649 545 14,194 2,274 16.0% Software 17,792 2,312 20,105 6,867 34.2% Systems and Technology* 9,041 423 9,464 (133) -1.4% Global Financing 1,488 1,628 3,116 1,582 50.8% $70,604 $5,710 $76,314 $15,583 20.4% 378 (5,710) (5,331) (2,441) $70,982 $0 $70,982 $13,142 TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED * Reclassified to reflect discontinued operations presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION 18.5% U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) Gross Profit THIRD-QUARTER 2014 CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ --------------------$10,874 $106 $43 $11,023 Gross Profit Margin 48.6% 0.5Pts 0.2Pts 49.2% S,G&A 5,281 (96) (48) 5,137 R,D&E 1,354 19 1,373 Other (Income) & Expense (103) 0 Total Expense & Other (Income) 6,513 (96) (29) 6,389 Pre-Tax Income from Continuing Operations 4,361 202 71 4,634 Pre-Tax Income Margin from Continuing Operations 19.5% 0.9Pts 0.3Pts 20.7% 906 42 14 963 Effective Tax Rate 20.8% 0.0Pts 0.0Pts 20.8% Income from Continuing Operations 3,455 159 57 3,671 Income Margin from Continuing Operations 15.4% 0.7Pts 0.3Pts 16.4% Provision for Income Taxes*** - (103) Loss from Discontinued Operations Net of Taxes (3,437) - Net Income 18 159 57 234 $3.46 ($3.44) $0.16 - $0.06 - $3.68 ($3.44) Diluted Earnings Per Share: Continuing Operations Discontinued Operations - (3,437) THIRD-QUARTER 2013**** CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ --------------------- Gross Profit $11,429 $102 $154 $11,686 Gross Profit Margin 49.0% 0.4Pts 0.7Pts 50.1% S,G&A 5,260 (111) (89) 5,060 R,D&E 1,356 - (14) 1,342 Other (Income) & Expense (63) (1) Total Expense & Other (Income) 6,458 (112) (103) 6,243 Pre-Tax Income from Continuing Operations 4,972 214 257 5,443 Pre-Tax Income Margin from Continuing Operations 21.3% 0.9Pts 1.1Pts 23.3% 832 48 77 958 Effective Tax Rate 16.7% 0.2Pts 0.6Pts 17.6% Income from Continuing Operations 4,139 166 181 4,485 Income Margin from Continuing Operations 17.7% 0.7Pts 0.8Pts 19.2% Provision for Income Taxes*** Loss from Discontinued Operations Net of Taxes Net Income Diluted Earnings Per Share: Continuing Operations Discontinued Operations (98) - (64) - - (98) 4,041 166 181 4,387 $3.77 ($0.09) $0.15 - $0.16 - $4.08 ($0.09) * Includes amortization of acquired intangible assets and other acquisition-related charges. ** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance. *** Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results. **** Reclassified to reflect discontinued operations presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) NINE-MONTHS 2014 CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ ------------ ----------- Gross Profit $33,545 $315 $141 $34,001 48.8% 0.5Pts 0.2Pts 49.5% S,G&A 17,146 (291) (162) 16,693 R,D&E 4,117 56 4,173 Other (Income) & Expense (433) 0 Total Expense & Other (Income) 20,654 (292) (106) 20,257 Pre-Tax Income from Continuing Operations 12,891 607 246 13,744 Pre-Tax Income Margin from Continuing Operations 18.8% 0.9Pts 0.4Pts 20.0% Provision for Income Taxes*** 2,655 123 49 2,827 Effective Tax Rate 20.6% 0.0Pts 0.0Pts 20.6% Income from Continuing Operations 10,237 483 197 10,917 0.7Pts 0.3Pts 15.9% Gross Profit Margin Income Margin from Continuing Operations 14.9% - (433) Loss from Discontinued Operations Net of Taxes (3,698) - - Net Income 6,539 483 197 7,219 $10.09 ($3.65) $0.48 - $0.19 - $10.76 ($3.65) Diluted Earnings Per Share: Continuing Operations Discontinued Operations Gross Profit Gross Profit Margin (3,698) NINE-MONTHS 2013**** CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ ------------ ----------$34,347 $289 $474 $35,110 48.4% 0.4Pts 0.7Pts 49.5% S,G&A 17,463 (294) (286) 16,884 R,D&E 4,291 - (43) 4,248 Other (Income) & Expense (217) (8) Total Expense & Other (Income) 21,205 (302) (329) 20,574 Pre-Tax Income from Continuing Operations 13,142 590 803 14,536 - (225) Pre-Tax Income Margin from Continuing Operations 18.5% 0.8Pts 1.1Pts 20.5% Provision for Income Taxes*** 2,478 112 239 2,828 Effective Tax Rate 18.9% 0.0Pts 0.6Pts 19.5% Income from Continuing Operations 10,665 479 564 11,708 0.7Pts 0.8Pts 16.5% Income Margin from Continuing Operations 15.0% Loss from Discontinued Operations Net of Taxes (366) Net Income Diluted Earnings Per Share: Continuing Operations Discontinued Operations - - (366) 10,299 479 564 11,342 $9.60 ($0.33) $0.43 - $0.51 - $10.54 ($0.33) * Includes amortization of acquired intangible assets and other acquisition-related charges. ** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance. *** Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results. **** Reclassified to reflect discontinued operations presentation. Contact: IBM Mike Fay, 914-525-8476 [email protected] John Bukovinsky, 732-618-3531 [email protected]