® 2Q 2012 Earnings Presentation July 18, 2012 www.ibm.com/investor Forward Looking Statements and Non-GAAP Information Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company's filings with the SEC. Copies are available from the SEC, from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. These charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together. In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, certain non-GAAP information including "operating earnings" and other "operating" financial measures. The rationale for management’s use of this non-GAAP information, the reconciliation of that information to GAAP, and other related information are included in supplemental materials entitled “Non-GAAP Supplemental Materials” that are posted on the Company’s investor relations web site at http://www.ibm.com/investor/2q12/ The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated July 18, 2012. www.ibm.com/investor 2 2Q 2012 Highlights Revenue $25.8B (3%), +1% yr/yr @CC Operating Net Income $4.1B +8% yr/yr Operating (Non-GAAP) EPS $3.51 +14% yr/yr Free Cash Flow $3.7B +9% yr/yr 2Q Segment highlights: • Software revenue @CC led by Europe, Japan, Growth Markets • Services profit +18%; backlog flat @CC • Systems & Technology impacted by product cycle; gained share in Power Expanded gross, pre-tax, and net operating margins Strong cash flow supports investment and shareholder returns Increasing expectations to at least $15.10 of Operating EPS in 2012 www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights Revenue 2Q12 $25.8 (3%) GP Margin 48.2% 1.5 pts 1% PTI Margin 21.1% 2.2 pts $4.1 8% Tax Rate 25.0% $3.51 14% NI Margin 15.8% 1.6 pts @CC NI – Operating EPS – Operating P&L Ratios (Operating) B/(W) Yr/Yr Cash Highlights 2Q12 2Q12 Last 12 Mos. $3.7 $18.0 Share Repurchase 3.0 13.0 Dividends 1.0 3.6 Free Cash Flow (excl GF Receivables) Cash Balance @ June 30 B/(W) Yr/Yr Flat 11.2 www.ibm.com/investor 4 Revenue by Geography $ in Billions 2Q12 Americas B/(W) Yr/Yr Rptd @CC $11.1 (1%) 1% Europe/ME/A 7.9 (9%) Flat Asia Pacific 6.3 2% OEM 0.5 IBM $25.8 Major Markets Growth Markets BRIC Countries (24%) 4% (24%) (3%) 1% (4%) (1%) 2% 8% 5% 12% Canada/ LA EMEA U.S. Flat Japan APac - 5% @CC OEM Performance led by Growth Markets www.ibm.com/investor 5 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions 2Q12 B/(W) Yr/Yr Rptd @CC 2Q12 B/(W) Yr/Yr Pts $10.0 (2%) 2% 36.3% 2.3 pts Global Business Services 4.7 (4%) (1%) 30.7% 1.9 pts Software 6.2 Flat 4% 88.4% Flat Systems & Technology 4.3 (9%) (7%) 38.3% (2.3 pts) Global Financing 0.5 Flat 4% 46.0% (2.7 pts) (3%) 1% 48.2% 1.5 pts Global Technology Services Total Revenue & Operating GP Margin $25.8 www.ibm.com/investor 6 Expense Summary $ in Billions 2Q12 B/(W) Yr/Yr SG&A – Operating $5.7 RD&E – Operating 1.6 Currency Acq.* Base 4% 5 pts (2 pts) 1 pts Flat 3 pts (3 pts) 1 pts 7 pts (2 pts) 1 pts IP and Development Income (0.3) (2%) Other (Income)/Expense (0.1) nm 0.1 (20%) Interest Expense Operating Expense & Other Income $7.0 B/(W) Yr/Yr Drivers 6% * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges www.ibm.com/investor 7 Services Segments Global Technology Services (GTS) $ in Billions 2Q12 Revenue (External) Gross Margin (External) $10.0 36.3% Pre-Tax Income $1.8 PTI Margin 17.1% 2Q12 Revenue Global Business Services (GBS) B/(W) Yr/Yr @CC Rptd (2%) 2.3 pts 2% 3.6 pts PTI Margin Rptd (3%) Flat (3%) @CC 2% 4% 2% (5%) (4%) (1%) Flat GBS GBS Outsourcing Consulting & Systems Integration Services Backlog 2Q12 $136B (6%) (4%) 30.7% 1.9 pts $0.8 7% 16.6% 1.8 pts Pre-Tax Income Yr/Yr GTS GTS Outsourcing Integrated Technology Services Maintenance $4.7 Revenue (External) Gross Margin (External) 24% 2Q12 B/(W) Yr/Yr Rptd @CC $ in Billions Flat (1%) 2Q12 Revenue (% of Total Services) Maint. 12% ITS 16% GTS Outsourcing 40% GBS Outsourcing 7% GBS C&SI 25% Total Services Pre-Tax Income +18% yr/yr www.ibm.com/investor 8 Software Segment $ in Billions 2Q12 $6.2 88.4% $2.5 35.9% Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 2Q12 Revenue Yr/Yr Rptd @CC 3% 7% (1%) 3% Tivoli 2% 6% Lotus (8%) (4%) Rational (7%) (3%) Flat 4% (1%) 3% Flat 4% WebSphere Family Information Management Key Branded Middleware Total Middleware Total Software B/(W) Yr/Yr Rptd @CC Flat 4% Flat 8% 2.7 pts 2Q12 Revenue (% of Total Software) Key Branded Middleware 64% Other Middleware 18% Operating Systems Other 10% 8% Share gains in WebSphere and Tivoli www.ibm.com/investor 9 Systems & Technology Segment $ in Billions Revenue (External) Gross Margin (External) 2Q12 B/(W) Yr/Yr Rptd @CC $4.3 (9%) 38.3% (2.3 pts) Pre-Tax Income $0.2 (40%) PTI Margin 5.3% 2Q12 Revenue System z Power Systems System x Storage Retail Store Solutions Total Systems Microelectronics OEM Total Systems & Technology Yr/Yr Rptd (11%) (7%) (8%) (4%) (4%) (7%) (22%) (9%) @CC (9%) (4%) (5%) Flat (1%) (5%) (22%) (7%) (7%) (2.7 pts) 2Q12 Revenue (% of Total Sys & Tech) Servers 66% Storage 20% M i cr RSS o OE 1 0% M Continued share gains in Power driven by competitive displacements www.ibm.com/investor 10 Cash Flow Analysis 2Q12 B/(W) Yr/Yr YTD 1H12 B/(W) Yr/Yr $4.4 $0.2 $8.7 $0.7 (0.5) (0.5) 0.9 (1.0) 4.9 0.6 7.8 1.6 (1.3) (0.3) (2.3) (0.3) 3.7 0.3 5.5 1.4 Acquisitions (0.6) (0.5) (1.9) (1.8) Divestitures 0.0 0.0 0.0 0.0 Dividends (1.0) (0.1) (1.8) (0.1) Share Repurchases (3.0) 1.0 (6.0) 2.0 0.9 1.0 1.6 0.6 (1.2) (1.3) 1.9 (2.9) $ in Billions Net Cash from Operations Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Non-GF Debt Other (includes GF A/R & GF Debt) Change in Cash & Marketable Securities ($1.1) $0.3 ($0.7) ($0.8) Strong Free Cash Flow performance www.ibm.com/investor 11 Balance Sheet Summary June 11 Dec. 11 June 12 $11.8 $11.9 $11.2 Non-GF Assets* 68.8 69.4 70.2 Global Financing Assets 32.9 35.1 32.5 113.5 116.4 113.8 Other Liabilities 60.5 64.9 60.8 Non-GF Debt* 6.4 8.0 9.8 23.4 23.3 22.6 29.8 31.3 32.4 Total Liabilities 90.3 96.2 93.3 Equity 23.2 20.2 20.6 24% 32% 36% 7.0 7.2 7.0 $ in Billions Cash & Marketable Securities Total Assets Global Financing Debt Total Debt Non-GF Debt / Capital Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 12 Operating EPS Bridge – 2Q11 to 2Q12 $0.17 $3.51 $0.35 $3.09 ($0.10) 2Q11 Operating EPS Revenue Growth @ Actual Margin Expansion www.ibm.com/investor Share Repurchases 2Q12 Operating EPS 13 2015e At least $20 2Q 2012 Summary Continued strength in growth initiatives • Growth markets YTD revenue up 9% yr/yr @CC 2012e $15.10+ 2011 $13.44 2010 $11.67 • Business analytics YTD revenue up 13% yr/yr • Cloud YTD revenue doubled yr/yr • Smarter Planet YTD revenue >20% yr/yr Annuity businesses provide solid base of revenue, profit and cash Productivity initiatives drive structural improvements and contribute to margin expansion Strong cash performance supports investment and shareholder returns Operating EPS Increasing expectations to at least $15.10 of Operating EPS in 2012 www.ibm.com/investor 14 www.ibm.com/investor 15 Supplemental Materials Supplemental Materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems & Technology, Software Global Financing Portfolio Revenue by Key Industry Sales Unit Cash Flow (FAS 95) Non-GAAP Supplemental Materials • Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency • Cash Flow, Debt-to-Capital Ratio • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 2Q 2012 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2011 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2012 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2011 • Reconciliation of Free Cash Flow (excluding GF Receivables) • Reconciliation of Revenue Growth • Reconciliation of B/(W) Yr/Yr Expense Drivers – 2Q12 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Operating EPS Bridge 2Q11 to 2Q12 www.ibm.com/investor 16 Currency – Year/Year Comparison Quarterly Averages per US $ Yr/Yr @ 7/17 Spot 3Q12 4Q12 FY12 1Q12 Yr/Yr 2Q12 Yr/Yr 7/17 Spot Euro 0.76 (4%) 0.78 (12%) 0.82 (15%) (10%) (10%) Pound 0.64 (2%) 0.63 (3%) 0.64 (3%) (1%) (2%) 79 4% 80 2% 79 (2%) (2%) 0% Yen IBM Revenue Impact (1 pts) (4 pts) ~(4-5 pts) ~(2-3 pts) ~(3 pts) ~(3 pts) ~(3 pts) ~(0-1 pts) (2 pts) (US$B) Yr/Yr (US$B) (US$B) (US$B) $25.8 (3%) ($1.2) ($0.8) ($3.1) April 17 View 2Q12 Revenue As Reported Currency Impact Revenue @CC (1.0) (4 pts) 1% www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 2Q 2012 Supplemental Revenue Information Supplemental Backlog / Signings Information Revenue Growth $ in Billions Yr/Yr @CC Global Services 2Q12 Yr/Yr @CC (3%) 2% Total Backlog $136 ($8) $1 Flat 4% Change in Backlog due to Currency (3%) 2% (2%) 2% ($8) ($2) GBS Outsourcing (5%) (1%) GBS C&SI (4%) Flat (4%) (1%) Global Services GTS Outsourcing Integrated Tech Services Maintenance Total GTS Total GBS Backlog Quarter-to-Quarter ($3) Year-to-Year ($9) Outsourcing Backlog $88 $ in Billions Global Services Outsourcing Signings 2Q12 Yr/Yr @CC $6.8 (5%) (1%) 6.9 (3%) 1% $13.7 (4%) Flat - GTS O/S, GBS O/S (AMS) Total Outsourcing (3%) 1% Total Transactional (3%) 1% Maintenance (3%) 2% Transactional - ITS, Consulting & AMS SI (incl. US Federal) Total Signings Note: Actual backlog calculated using June 30 currency spot rates www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 2Q 2012 Revenue Growth Revenue Growth Systems & Technology Yr/Yr @CC GP% Share Software Yr/Yr @CC 3% 7% (1%) 3% Tivoli 2% 6% WebSphere Family (11%) (9%) Power Systems (7%) (4%) System x (8%) (5%) Lotus (8%) (4%) Storage (4%) Flat Rational (7%) (3%) Retail Store Solutions (4%) (1%) Flat 4% (7%) (5%) (3%) 1% (1%) 3% (22%) (22%) Operating Systems Flat 3% (9%) (7%) Other Software/Services 8% 12% Total Software Flat 4% System z Total Systems Microelectronics OEM Total Systems & Technology Information Management = Key Branded Middleware Other Middleware Total Middleware www.ibm.com/investor 19 Supplemental Materials Global Financing Portfolio 2Q12 – $25.1B Net External Receivables 40% Investment Grade 61% Non-Investment Grade 39% 37% 30% 20% 24% 21% 10% 12% 0% Aaa-A3 Baa1-Baa3 Ba1-Ba2 1% B2-B3 Caa-D 2Q12 1Q12 2Q11 Identified Loss Rate 0.8% 0.8% 1.0% Anticipated Loss Rate 0.5% 0.5% 0.3% Reserve Coverage 1.3% 1.3% 1.3% 2.6 2.8 2.4 $33M $68M $32M Client Days Delinquent Outstanding Commercial A/R > 30 days 20 Ba3-B1 5% www.ibm.com/investor 20 Supplemental Materials Revenue by Key Industry Sales Unit $ in Billions Financial Services 2Q12 $7.5 B/(W) Yr/Yr Rptd @CC (3%) 1% Public 4.0 1% 4% Industrial 2.6 (1%) 3% Distribution 2.4 (7%) (4%) Communications 2.4 (9%) (5%) General Business 5.5 Flat 5% (3%) 1% Total IBM $25.8 www.ibm.com/investor Public Financial Services Industrial Distribution Comms General Business 21 Supplemental Materials $ in Billions Cash Flow (FAS 95) QTD 2Q12 QTD 2Q11 YTD 1H12 YTD 1H11 $3.9 $3.7 $6.9 $6.5 Depreciation / Amortization of Intangibles 1.2 1.2 2.3 2.4 Stock-based Compensation 0.2 0.2 0.3 0.3 Working Capital / Other (0.3) (0.7) (1.8) (3.1) Global Financing A/R (0.5) 0.0 0.9 1.9 4.4 4.3 8.7 8.1 (1.3) (1.0) (2.3) (2.0) 0.0 0.0 0.0 0.0 (0.6) (0.1) (1.9) (0.2) 0.2 0.5 0.3 2.1 (1.7) (0.6) (3.9) (0.1) 0.3 (0.7) 1.3 1.0 Dividends (1.0) (0.9) (1.8) (1.7) Common Stock Repurchases (3.0) (4.0) (6.0) (8.0) 0.3 0.7 0.9 1.6 Net Cash used in Financing Activities (3.4) (4.9) (5.7) (7.2) Effect of Exchange Rate changes on Cash (0.4) 0.2 (0.2) 0.3 ($1.1) $1.1 Net Income from Operations Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Acquisitions, net of cash acquired Marketable Securities / Other Investments, net Net Cash used in Investing Activities Debt, net of payments & proceeds Common Stock Transactions - Other Net Change in Cash & Cash Equivalents ($1.0) www.ibm.com/investor ($1.0) 22 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. Effective January 1, 2011, 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 23 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 profit-generating 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. www.ibm.com/investor 24 Supplemental Materials Non -GAAP Supplemental Materials Non-GAAP Reconciliation of Operating Earnings Per Share 2012 Expectations IBM GAAP EPS $14.40+ IBM Operating EPS (Non-GAAP) $15.10+ Adjustments Acquisition-Related Charges * $0.46 Amortization of Purchased Intangibles $0.43 Other Acquisition-Related Charges $0.03 Non-Operating Retirement-Related Items $0.24 * Includes acquisitions closed as of 6/30/2012 The above serves to reconcile the Non-GAAP financial information contained in the “2Q 2012 Highlights” and “2Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 25 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 2Q 2012 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,281 $93 $66 $12,440 SG&A 5,837 (87) (33) 5,717 RD&E 1,587 0 5 1,592 (132) (1) 0 (133) Total Operating Expense & Other Income 7,120 (88) (28) 7,004 Pre-Tax Income 5,161 181 94 5,436 Tax *** 1,280 49 30 1,359 Net Income 3,881 132 64 4,077 Diluted Earnings Per Share $3.34 $0.11 Other Income & Expense $0.06 $3.51 * 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 “2Q 2012 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 26 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 2Q 2011 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,385 $87 $6 $12,477 (76) (5) 5,950 24 1,593 SG&A 6,030 RD&E 1,569 Other Income & Expense 0 97 (1) 0 96 Total Operating Expense & Other Income 7,500 (77) 18 7,441 Pre-Tax Income 4,885 163 (12) 5,036 Tax *** 1,221 38 0 1,259 Net Income 3,664 126 (13) 3,777 Diluted Earnings Per Share $3.00 $0.10 ($0.01) $3.09 * 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 “2Q 2012 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 27 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 2Q 2012 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 47.6% 0.4 pts 0.3 pts 48.2% PTI Margin 20.0% 0.7 pts 0.4 pts 21.1% Tax Rate *** 24.8% 0.1 pts 0.1 pts 25.0% Net Income Margin 15.1% 0.5 pts 0.2 pts 15.8% * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 28 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 2Q 2011 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 46.4% 0.3 pts 0.0 pts 46.8% PTI Margin 18.3% 0.6 pts (0.0 pts) 18.9% Tax Rate *** 25.0% (0.1 pts) 0.1 pts 25.0% Net Income Margin 13.7% 0.5 pts (0.0 pts) 14.2% * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 29 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Free Cash Flow (excluding GF Receivables) 12 months ended 6/30/12 $ in Billions Net Cash from Operations $20.5 Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures (1.8) 22.3 (4.3) Free Cash Flow (excluding GF Receivables) $18.0 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 30 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth 2Q12 Yr/Yr As Rptd @CC China 26% 24% Japan (3%) (5%) Major Markets – Services (4%) (1%) Growth Markets – Services Growth Markets – ITS Europe – GBS Storage Software 3% 10% 10% 16% (11%) 9% (3%) 13% 1H12 Yr/Yr As Rptd Growth Markets 5% @CC 9% The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography,” “Services Segments,” “Software Segment,” “Systems and Technology Segment,” and “2Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 31 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of B/(W) Yr/Yr Expense Drivers – 2Q12 GAAP Non-GAAP Adjustments Operating (Non-GAAP) 5 pts 0 pts 5 pts (2 pts) 0 pts (2 pts) 1 pts 0 pts 1 pts 3 pts 0 pts 3 pts (3 pts) 0 pts (3 pts) 0 pts 1 pts 1 pts 7 pts 0 pts 7 pts (3 pts) 0 pts (2 pts) 0 pts 1 pts 1 pts SG&A Currency Acquisitions Base 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 23 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 32 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Debt-to-Capital Ratio 2Q11 FY11 2Q12 Non-Global Financing Debt / Capital 24% 32% 36% IBM Consolidated Debt / Capital 56% 61% 61% The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 33 Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating EPS Bridge 2Q11 to 2Q12 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) 2Q11 EPS $3.00 $0.10 ($0.01) $3.09 Revenue growth @ actual (0.10) - - (0.10) Margin expansion 0.28 - 0.07 0.35 Share repurchases 0.16 0.01 - 0.17 $3.34 $0.11 2Q12 EPS $0.06 $3.51 * 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 – 2Q11 to 2Q12” discussion in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 34 www.ibm.com/investor 35