IBM REPORTS 2014 SECOND-QUARTER RESULTS o o o o o o o Diluted EPS: - GAAP: $4.12, up 42 percent; - Operating (non-GAAP): $4.32, up 34 percent; Net income: - GAAP: $4.1 billion, up 28 percent; - Operating (non-GAAP): $4.3 billion, up 21 percent; Gross profit margin: - GAAP: 49.1 percent, up 50 basis points; - Operating (non-GAAP): 49.8 percent, up 10 basis points; Revenue: $24.4 billion: - Down 2 percent; down 1 percent adjusting for divested customer care outsourcing business; - Software, Services adjusting for divested customer care outsourcing business and Global Financing grew; Systems and Technology declined; Services backlog of $136 billion, down 1 percent adjusting for divested customer care outsourcing business; Strategic growth initiatives grew double digits: - Cloud revenue up more than 50 percent year-to-date; -- For cloud delivered as a service, second-quarter annual run rate up nearly 100 percent to $2.8 billion year-to-year; - Business analytics revenue up 7 percent year-to-date; - Mobile revenue up more than 100 percent year-to-date; - Security revenue up more than 20 percent year-to-date; Continue to expect full-year operating (non-GAAP) EPS of at least $18.00. ARMONK, N.Y., July 17, 2014 . . . IBM (NYSE: IBM) today announced second-quarter 2014 diluted earnings of $4.12 per share, compared with diluted earnings of $2.91 per share in the second quarter of 2013, an increase of 42 percent. Operating (non-GAAP) diluted earnings were $4.32 per share, compared with operating diluted earnings of $3.22 per share in the second quarter of 2013, an increase of 34 percent. Second-quarter net income was $4.1 billion compared with $3.2 billion in the second quarter of 2013, an increase of 28 percent. Operating (non-GAAP) net income was $4.3 billion compared with $3.6 billion in the second quarter of 2013, an increase of 21 percent. The year-to-year results include the impact of a charge in the prior year period of $1 billion for workforce rebalancing. Total revenues for the second quarter of 2014 of $24.4 billion were down 2 percent (down 1 percent, as reported and adjusting for currency, adjusting for the divested customer care outsourcing business) from the second quarter of 2013. “In the second quarter, we made further progress on our transformation. We performed well in our strategic imperatives around cloud, big data and analytics, security and mobile,” said Ginni Rometty, IBM chairman, president and chief executive officer. “We will continue to extend and leverage our unique strengths to address the emerging trends in enterprise IT and transform our business, positioning ourselves for growth over the long term.” Second-Quarter GAAP – Operating (non-GAAP) Reconciliation Second-quarter operating (non-GAAP) diluted earnings exclude $0.20 per share of charges: $0.16 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.04 per share for non-operating retirementrelated charges driven by changes to plan assets and liabilities primarily related to market performance. Full-Year 2014 Expectations IBM expects full-year 2014 GAAP diluted earnings per share of at least $17.00, and operating (non-GAAP) diluted earnings per share of at least $18.00. The 2014 operating (non-GAAP) earnings expectations exclude $1.00 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges. Geographic Regions The Americas’ second-quarter revenues were $10.6 billion, a decrease of 1 percent (up 1 percent, adjusting for currency) from the 2013 period. Revenues from Europe/Middle East/Africa were up 1 percent at $7.9 billion (down 3 percent adjusting for currency). Asia-Pacific revenues decreased 9 percent (down 6 percent adjusting for currency) to $5.3 billion. OEM revenues were $433 million, down 19 percent (down 19 percent adjusting for currency) compared with the 2013 second quarter. Growth Markets Revenues from the company’s growth markets were down 7 percent (down 4 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were down 2 percent (up 1 percent, adjusting for currency). Services Global Services segment revenues decreased 1 percent (down 1 percent, adjusting for currency) to $13.9 billion. Revenues increased 1 percent adjusting for the impact of the divested customer care outsourcing business. Global Technology Services segment revenues decreased 1 percent (down 1 percent, adjusting for currency) to $9.4 billion. Adjusting for the impact of the divested customer care outsourcing business, revenues were up 2 percent (up 2 percent adjusting for currency). Global Business Services segment revenues were down 2 percent (down 2 percent, adjusting for currency) to $4.5 billion. Pre-tax income from Global Technology Services increased 22 percent and pre-tax margin increased to 19.2 percent, including the impact of a $0.4 billion workforce rebalancing charge in the prior year. Global Business Services pre-tax income increased 34 percent and pre-tax margin increased to 17.8 percent, including the impact of a $0.2 billion workforce rebalancing charge in the prior year. The estimated services backlog at June 30 was $136 billion, down 1 percent adjusting for the divested customer care outsourcing business (down 3 percent adjusting for currency). Software Revenues from the Software segment were $6.5 billion, up 1 percent (flat adjusting for currency) compared with the second quarter of 2013. Software pre-tax income increased 10 percent and pre-tax margin increased to 36.5 percent, including the impact of a $0.2 billion workforce rebalancing charge in the prior year. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $4.3 billion, up 1 percent (flat adjusting for currency) versus the second quarter of 2013. Operating systems revenues of $530 million were down 13 percent (down 13 percent, adjusting for currency) compared with the prior-year quarter. Financing Global Financing segment revenues increased 4 percent (up 4 percent, adjusting for currency) in the second quarter at $504 million. Pre-tax income for the segment increased 8 percent to $593 million. Hardware Revenues from the Systems and Technology segment totaled $3.3 billion for the quarter, down 11 percent (down 12 percent, adjusting for currency) from the second quarter of 2013. Systems and Technology segment pre-tax income increased $0.2 billion, including the impact of a $0.2 billion workforce rebalancing charge in the prior year. Total systems revenues decreased 11 percent (down 11 percent, adjusting for currency). Revenues from System z mainframe server products, in the seventh quarter since they were announced, decreased 1 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), was flat. Revenues from Power Systems were down 28 percent compared with the 2013 period. Revenues from System x were down 3 percent. Revenues from System Storage decreased 12 percent and within this business area, flash storage grew more than 100 percent. Revenues from Microelectronics OEM decreased 18 percent. Gross Profit The company’s total gross profit margin was 49.1 percent in the 2014 second quarter compared with 48.7 percent in the 2013 second-quarter period. Total operating (non-GAAP) gross profit margin was 49.8 percent in the 2014 second quarter compared with 49.7 percent in the 2013 second-quarter period, with increases in Global Technology Services and Global Financing. Expense Total expense and other income decreased to $6.8 billion or 15 percent, including a gain of $121 million from the divestiture of the customer care outsourcing business and the impact of a $1.0 billion workforce rebalancing charge in the prior year period. S,G&A expense of $5.6 billion decreased 16 percent year over year. R,D&E expense of $1.5 billion decreased 6 percent compared with the year-ago period, and was 6 percent of revenue, consistent with the second-quarter of 2013. Intellectual property and custom development income decreased to $191 million compared with $247 million a year ago. Other (income) and expense was income of $201 million compared with prior-year income of $91 million. Interest expense increased to $136 million compared with $98 million in the prior year. Total operating (non-GAAP) expense and other income decreased 14 percent to $6.7 billion compared with the prior-year period, including the impact of a $1.0 billion workforce rebalancing charge in the prior year period. Operating (non-GAAP) S,G&A expense decreased 16 percent to $5.5 billion compared with the prior-year period. Operating (non-GAAP) R,D&E expense of $1.5 billion was down 4 percent compared with the year-ago period. Pre-Tax Income Pre-tax income increased 25 percent to $5.2 billion and pre-tax margin of 21.2 percent was up 4.6 points compared with the prior-year period. Operating (non-GAAP) pre-tax income increased 18 percent to $5.4 billion and pre-tax margin was 22.3 percent, up 3.9 points. *** IBM’s tax rate was 20.0 percent, down 2.1 points year over year; operating (nonGAAP) tax rate was 20.0 percent, down 2.0 points compared to the year-ago period. Net income margin increased 4.0 points to 17.0 percent. Total operating (nonGAAP) net income margin increased 3.5 points to 17.8 percent. The weighted-average number of diluted common shares outstanding in the secondquarter 2014 was 1.01 billion compared with 1.11 billion shares in the same period of 2013. As of June 30, 2014, there were 998 million basic common shares outstanding. Debt, including Global Financing, totaled $46.5 billion, compared with $39.7 billion at year-end 2013. From a management segment view, Global Financing debt totaled $29.4 billion versus $27.5 billion at year-end 2013, resulting in a debt-toequity ratio of 7.1 to 1. Non-global financing debt totaled $17.1 billion, an increase of $4.9 billion since year-end 2013, resulting in a debt-to-capitalization ratio of 56.1, essentially flat quarter-to-quarter and higher than the ratio at yearend 2013. IBM ended the second-quarter 2014 with $9.7 billion of cash on hand and generated free cash flow of $3.0 billion, excluding Global Financing receivables, up $0.3 billion year over year. The company returned $4.8 billion to shareholders through $1.1 billion in dividends and $3.7 billion of gross share repurchases. Year-To-Date 2014 Results Net income for the six months ended June 30, 2014 was $6.5 billion compared with $6.3 billion in the year-ago period, an increase of 4 percent. Diluted earnings per share were $6.37 compared with $5.60 per diluted share for the 2013 period, an increase of 14 percent. Revenues for the six-month period totaled $46.8 billion, a decrease of 3 percent (down 2 percent, adjusting for currency) compared with $48.3 billion for the first six months of 2013. Operating (non-GAAP) net income for the six months ended June 30, 2014 was $7.0 billion, flat year to year. Operating (non-GAAP) diluted earnings per share were $6.82 compared with $6.23 per diluted share for the 2013 period, an increase of 9.5 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 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 forwardlooking 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 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); o adjusting for the divestiture of the customer care outsourcing business. The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the second-quarter earnings materials. These materials are available via a link 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 4:30 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/2q14.html. available shortly before the Webcast. Presentation charts will be 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 Six Months Ended June 30, June 30, Percent Percent 2014 2013 Change 2014 2013 Change ------- ------------- ------- ------- ------REVENUE Global Technology Services Gross profit margin $9,414 38.4% $9,536 37.8% Global Business Services Gross profit margin 4,534 30.0% 4,606 31.2% -1.6% Software Gross profit margin 6,488 88.8% 6,423 88.8% Systems and Technology Gross profit margin 3,331 33.9% Global Financing Gross profit margin Other Gross profit margin -1.3% $18,744 38.2% $19,140 37.3% -2.1% 9,017 30.0% 9,091 29.9% -0.8% 1.0% 12,149 88.2% 11,995 88.1% 1.3% 3,758 36.7% -11.4% 5,722 31.0% 6,864 34.7% -16.6% 504 54.8% 487 46.3% 3.5% 1,016 50.4% 985 46.0% 3.1% 93 -179.7% 115 -190.5% -19.1% 200 -171.1% 257 -172.8% -22.0% TOTAL REVENUE 24,364 24,924 -2.2% 46,848 48,332 -3.1% GROSS PROFIT Gross margin 11,975 49.1% 12,132 48.7% -1.3% 22,518 48.1% 22,810 47.2% -1.3% S,G&A Expense to revenue 5,603 23.0% 6,680 26.8% -16.1% 11,892 25.4% 12,257 25.4% -3.0% R,D&E Expense to revenue 1,457 6.0% 1,548 6.2% -5.9% 2,958 6.3% 3,193 6.6% -7.3% Intellectual property and custom development income (191) (247) -22.7% (398) (430) -7.5% (201) (91) 120.7% (326) (151) 115.7% 136 98 38.3% 240 192 25.3% TOTAL EXPENSE AND OTHER INCOME Expense to revenue 6,804 27.9% 7,988 32.0% -14.8% 14,367 30.7% 15,060 31.2% -4.6% INCOME BEFORE INCOME TAXES Pre-tax margin 5,171 21.2% 4,144 16.6% 24.8% 8,151 17.4% 7,750 16.0% 5.2% 1,034 918 12.7% 1,630 1,492 9.3% 20.0% 22.1% 20.0% 19.2% EXPENSE AND OTHER INCOME Other (income) and expense Interest expense Provision for income taxes Effective tax rate NET INCOME $3,226 ====== 12.9% 28.2% $6,521 ====== 13.9% $6,258 ====== 12.9% 4.2% Net income margin $4,137 ====== 17.0% EARNINGS PER SHARE OF COMMON STOCK: ASSUMING DILUTION BASIC $4.12 $4.14 $2.91 $2.93 41.6% 41.3% $6.37 $6.41 $5.60 $5.65 13.8% 13.5% WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's): ASSUMING DILUTION 1,005.1 BASIC 999.6 1,109.4 1,100.9 1,023.5 1,017.4 1,116.7 1,107.3 INTERNATIONAL BUSINESS MACHINES CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited) (Dollars in Millions) At June 30, 2014 ------------- At December 31, 2013 ------------ ASSETS: Current Assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade (net of allowances of $294 in 2014 and $291 in 2013) Short-term financing receivables (net of allowances of $404 in 2014 and $308 in 2013) Other accounts receivable (net of allowances of $45 in 2014 and $36 in 2013) Inventories, at lower of average cost or market: 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 $68 in 2014 and $80 in 2013) Prepaid pension assets Deferred taxes Goodwill Intangible assets - net Investments and sundry assets Total Assets $9,715 5 $10,716 350 9,902 10,465 18,620 19,787 1,555 1,584 449 1,889 -------2,338 1,783 4,263 -------48,182 444 1,866 -------2,310 1,651 4,488 -------51,350 40,936 27,188 -------13,748 40,475 26,654 -------13,821 12,140 6,894 2,828 31,568 3,585 5,369 -------$124,314 ======== 12,755 5,551 3,051 31,184 3,871 4,639 -------$126,223 ======== $2,335 12,462 6,271 $4,633 6,862 7,461 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 4,037 12,591 4,737 -------42,433 3,893 12,557 4,748 -------40,154 34,008 32,856 15,984 4,152 10,224 -------106,801 16,242 4,108 9,934 -------103,294 52,163 134,483 (148,900) (20,369) -------17,377 51,594 130,042 (137,242) (21,602) -------22,792 136 -------17,513 -------$124,314 ======== 137 -------22,929 -------$126,223 ======== 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 June 30, 2014 2013 ------------$3,579 $3,175 Six Months Ended June 30, 2014 2013 ------------$6,905 $7,197 (304) ------ (450) ------ 1,503 ------ 1,147 ------ 3,883 3,625 5,402 6,051 (909) (939) (1,796) (1,668) 2,975 2,686 3,606 4,382 (339) 17 (1,096) (3,662) 1,385 (121) 2 (1,048) (3,552) 922 (603) 408 (2,086) (11,828) 5,019 (179) 12 (1,996) (6,145) 205 738 (524) 4,140 2,949 $17 ======== ($1,635) ======== ($1,345) ======= ($772) ======= INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) (Dollars in Millions) SECOND-QUARTER 2014 ----------------------------------------------Pre-tax --------- Revenue --------- Income/ Pre-tax External Internal Total (Loss) Margin -------- -------- --------- ------- ------- SEGMENTS Global Technology Services $9,414 Y-T-Y change -1.3% $247 -15.4% $9,661 -1.7% $1,850 22.2% 19.2% Global Business Services Y-T-Y change 4,534 -1.6% 140 -25.6% 4,674 -2.5% 832 33.7% 17.8% Software Y-T-Y change 6,488 1.0% 857 16.1% 7,345 2.6% 2,683 9.8% 36.5% 3,331 -11.4% 190 40.9% 3,521 -9.5% 25 117.9% 0.7% 504 3.5% 685 19.2% 1,189 12.0% 593 7.7% 49.8% TOTAL REPORTABLE SEGMENTS $24,271 Y-T-Y change -2.2% $2,119 9.9% $26,390 -1.3% $5,983 19.9% 22.7% 93 (2,119) (2,026) (812) $24,364 -2.2% $0 $24,364 -2.2% $5,171 24.8% Systems and Technology Y-T-Y change Global Financing Y-T-Y change Eliminations / Other TOTAL IBM CONSOLIDATED Y-T-Y change 21.2% SECOND-QUARTER 2013 ------------------------------------------------Pre-tax --------- Revenue --------Income/ Pre-tax External Internal Total (Loss) Margin -------- -------- --------- --------------- (Dollars in Millions) SEGMENTS Global Technology Services $9,536 $292 $9,828 $1,514 15.4% Global Business Services 4,606 188 4,795 623 13.0% Software 6,423 738 7,161 2,443 34.1% Systems and Technology 3,758 135 3,893 (141) -3.6% 487 575 1,061 550 51.8% $24,809 $1,928 $26,737 $4,989 18.7% 115 (1,928) (1,813) (846) $24,924 $0 $24,924 $4,144 Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) 16.6% (Dollars in Millions) SIX-MONTHS 2014 ------------------------------------------------Pre-tax --------- Revenue --------Income/ Pre-tax External Internal Total (Loss) Margin -------- -------- --------- --------- ------- SEGMENTS Global Technology Services Y-T-Y change $18,744 -2.1% $488 -9.7% $19,232 -2.3% $3,196 3.1% 16.6% 9,017 -0.8% 281 -23.7% 9,298 -1.7% 1,461 10.2% 15.7% Software Y-T-Y change 12,149 1.3% 1,789 14.1% 13,939 2.8% 4,601 3.2% 33.0% Systems and Technology Y-T-Y change 5,722 -16.6% 358 40.7% 6,080 -14.6% (635) -16.3% -10.4% 1,016 3.1% 1,303 16.7% 2,318 10.3% 1,188 9.2% 51.3% $46,648 -3.0% $4,218 9.7% $50,866 -2.0% $9,812 4.1% 19.3% 200 (4,218) (4,018) (1,660) $46,848 -3.1% $0 $46,848 -3.1% $8,151 5.2% Global Business Services 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 (Dollars in Millions) 17.4% SIX-MONTHS 2013 ------------------------------------------------Pre-tax --------- Revenue --------Income/ Pre-tax External Internal Total (Loss) Margin -------- -------- --------- --------------- SEGMENTS Global Technology Services Global Business Services Software Systems and Technology Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED $19,140 $540 $19,680 $3,099 15.7% 9,091 368 9,459 1,326 14.0% 11,995 1,569 13,563 4,457 32.9% 6,864 255 7,118 (546) -7.7% 985 1,116 2,101 1,088 51.8% $48,075 $3,847 $51,922 $9,425 18.2% 257 (3,847) (3,590) (1,675) $48,332 $0 $48,332 $7,750 16.0% INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) SECOND-QUARTER 2014 -----------------------------------------------Acquisition- Retirement- Gross Profit Related GAAP Adjustments* -------- -----------$11,975 $105 Related Operating Adjustments** (Non-GAAP) ------------ ----------$45 $12,126 Gross Profit Margin 49.1% 0.4Pts 0.2Pts 49.8% S,G&A 5,603 (98) (27) 5,478 R,D&E 1,457 0 20 1,477 Other (Income) & Expense (201) 0 0 (201) Total Expense & Other (Income) 6,804 (98) (7) 6,699 Pre-Tax Income 5,171 203 52 5,427 Pre-Tax Income Margin 21.2% 0.8Pts 0.2Pts 22.3% Provision for Income Taxes*** 1,034 41 10 1,085 Effective Tax Rate 20.0% 0.0Pts 0.0Pts 20.0% Net Income 4,137 163 42 4,341 Net Income Margin 17.0% 0.7Pts 0.2Pts 17.8% Diluted Earnings Per Share $4.12 $0.16 $0.04 $4.32 Gross Profit SECOND-QUARTER 2013 -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ --------------------$12,132 $91 $156 $12,379 Gross Profit Margin 48.7% 0.4Pts 0.6Pts 49.7% S,G&A 6,680 (91) (93) 6,496 R,D&E 1,548 0 (13) 1,535 (91) 0 0 (91) Total Expense & Other (Income) 7,988 (91) (106) 7,791 Pre-Tax Income 4,144 182 262 4,588 Pre-Tax Income Margin 16.6% 0.7Pts 1.1Pts 18.4% 918 9 82 1,009 Effective Tax Rate 22.1% -0.7Pts 0.6Pts 22.0% Net Income 3,226 173 180 3,579 Net Income Margin 12.9% 0.7Pts 0.7Pts 14.4% Diluted Earnings Per Share $2.91 $0.15 $0.16 $3.22 Other (Income) & Expense Provision for Income Taxes*** * 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 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. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) Gross Profit Gross Profit Margin SIX-MONTHS 2014 -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ ------------ ----------$22,518 $209 $98 $22,825 48.1% 0.4Pts S,G&A 11,892 (196) R,D&E 2,958 0 37 2,995 Other (Income) & Expense (326) 0 0 (326) 14,367 (196) (77) 14,094 Pre-Tax Income 8,151 405 175 8,731 Pre-Tax Income Margin 17.4% 0.9Pts 0.4Pts 18.6% Provision for Income Taxes*** 1,630 81 35 1,746 Effective Tax Rate 20.0% 0.0Pts 0.0Pts 20.0% Net Income 6,521 324 140 6,985 Net Income Margin 13.9% 0.7Pts 0.3Pts 14.9% Diluted Earnings Per Share $6.37 $0.31 $0.14 $6.82 Total Expense & Other (Income) Gross Profit Gross Profit Margin 0.2Pts (114) 48.7% 11,583 SIX-MONTHS 2013 -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ ------------ ----------$22,810 $186 $320 $23,316 47.2% 0.4Pts 0.7Pts 48.2% S,G&A 12,257 (183) (197) 11,878 R,D&E 3,193 0 (29) 3,163 Other (Income) & Expense (151) (7) 0 (158) 15,060 (190) (226) 14,644 7,750 376 546 8,672 Total Expense & Other (Income) Pre-Tax Income Pre-Tax Income Margin 16.0% 0.8Pts 1.1Pts 17.9% Provision for Income Taxes*** 1,492 63 162 1,717 Effective Tax Rate 19.2% -0.1Pts 0.7Pts 19.8% Net Income 6,258 313 384 6,955 Net Income Margin 12.9% 0.6Pts 0.8Pts 14.4% Diluted Earnings Per Share $5.60 $0.28 $0.35 $6.23 * 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 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. Contact: IBM Mike Fay, 914-525-8476 [email protected] John Bukovinsky, 732-618-3531 [email protected]